愛德士 (IDXX) 2009 Q4 法說會逐字稿

Good morning everyone and welcome to the IDEXX Laboratories fourth quarter 2009 earnings conference call. Just as a reminder today's conference is being recorded.

Participating in the call this morning are Jon Ayers, Chief Executive Officer, Merilee Raines, Chief Finance Officer, and Susan [Ostero], Director of Investor Relations. IDEXX would like process the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding management's future expectations and plans and IDEXX's future prospects constitute forward-looking statements for 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 September 30, 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 Web site, IDEXX.com. In addition, any forward-looking statements represent IDEXX's estimates only as of today and should not be relied upon as representing the Company's estimates as of any subsequent date. The Company disclaims any obligation to update or revise any forward-looking statements in the future even if its estimates or expectations change.

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

Thank you, Cynthia. Good morning and thank you for joining our call today. In our press release earlier this morning we reported fourth quarter revenues of $270.3 million, a year to year growth of 11%, and diluted earnings per share of $0.51, a growth of 31%.

By way of a quick recap, revenues came in about $10 million higher than our thinking at the time of our third quarter call at the end of October, driven primarily by stronger than anticipated placement of capital equipment in our companion animal businesses, as well as performance in our production animal and lab services business above our expectations. Additionally we benefited in the fourth quarter from a somewhat weaker than anticipated US dollar and modestly higher year end distributor orders leading to correspondingly higher ending inventories. Earnings per share were roughly $0.07 to $0.08 above our thinking in October. The components driving the over delivery were about $0.02 from the higher than expected distributor orders, $0.02 relating to the receipt of a milestone payment associated with the first commercial sale of the feline diabetes therapeutic that was underdevelopment when we sold it in the fourth quarter of last year as part of the pharmaceutical transaction. And $0.01 from favorable adjustments to our effective tax rate associated with the close out of an audit in Europe. The remaining $0.02 to $0.03 of upside was driven by the strong topline performance combined with continued expense management.

With regard to year to year earnings per share growth I want to mention that the quarters reported earnings growth benefited from events in both 2009 and 2008 that were distinct from the ongoing operating activities of our core businesses. In the fourth quarter of 2008, the sale of certain of our pharmaceutical product lines and related restructuring costs reduced EPS by $0.06. As just noted the fourth quarter of 2009 benefited from a pharmaceutical milestone payment and resolution of a tax audit which together contributed $0.03 to EPS. Normalizing both year's earnings for these items yields an EPS growth of 9%. I would also point out that the $2 million pharmaceutical milestone payment appears as a reduction to the G&A line of our P&L.

Now on to further highlights on our fourth quarter performance. Q4 revenues grew organically 6% after adjusting for a 5% favorable impact from currency. The net impact of acquisitions and divestitures was essentially nil. The fourth quarter organic growth is up a point from what we achieved in the second and third quarter and doubled the growth in the first quarter. Organic growth for the full year was 5%. We continue to try to triangulate information from multiple sources to assess the impact of the economy on our businesses.

In addition to anecdotal information from our commercial organizations, and external information we can glean from our markets, for the US vet market in particular we continue to analyze patient visit volume and practice revenues from data derived from a consistent set of customers using our practice management software. In the fourth quarter, patient visits were down a little less than 1% and clinic revenues increased a little less than 1% from the fourth quarter of last year. Though this is an improvement from the roughly 3% decline in visits and 2% decline in revenues that we saw in the first three quarters of 2009, it is still modest and we anticipated an improvement in the fourth quarter giving ease in comparisons to 2008 quarters. So as we stated last quarter we continue to believe that our businesses will see only a slight and gradual benefit from a stabilizing and then slowly improving economy over the course of 2010. The improvement will be gated by consumer spending as impacted by unemployment and consumer confidence levels. This assumption holds true across our businesses and geographies generally with the exception of our Asian markets where economies are relatively much stronger.

Sales of instruments in our IDEXX VetLab Suite at $25.5 million grew 6% in constant currency in the fourth quarter. We are pleased with this result given that fourth quarter last year was a very strong capital quarter with over 25% growth in revenue. Catalyst continues to play the lead role in driving growth, so the impact diminishes each quarter as placement comparisons progress through the 2008 launch ramp. With very strong commercial performance in North America and Europe, we placed 763 Catalysts in the fourth quarter of 2009, bringing the full year placements to nearly 2,050 and the install base to nearly 2,800. Roughly 25% of the placements in the fourth quarter were to new and competitive accounts, on par with the third quarter.

Combined fourth quarter VetTest and Catalyst placements were up approximately 20% year to year. Our continuing innovations focused on product line integration and information management are increasingly encouraging customers to purchase multiple components of the IDEXX VetLab Suite simultaneously. And accordingly over 80% of the instruments we sold in North America in the fourth quarter were placed with multiple instruments. Instrument consumable sales, up $57.3 million, grew organically 9%, or 6% when further normalized for changes in distributor inventories. This normalized growth is up a couple of points from what we saw in the first three quarters of the year. Accelerating growth is a function of strong placements and easing year to year comparisons related to the economy.

Over time, we anticipate that Catalyst placements will have an increasingly positive influence on consumable growth rates given the instruments particular appeal to practices with medium to high testing volume, and given the early encouraging signs that its ease of use and high throughput seem to foster increased testing not only for chemistries but for other analytes as well. To further quantify this we updated the analysis we performed in the third quarter regarding consumable usage by Catalyst owners to incorporate fourth quarter data. This update reaffirms our observation that the growth in testing is approximately 15% higher for our Catalyst customers who were previously VetTest owners compared to our population of VetTest owners.

In the fourth quarter our Rapid Assay sales, up $30.1 million, decline organically year over year by 2%. When further normalized for changes in distributor inventory levels, revenues were up 2% in the fourth quarter, compared to a 1% decline in the third quarter. We had anticipated a sequential pickup in growth rates given the changes we made in 2009 to our annual SNAP K9 loyalty marketing program which resulted in more level loaded purchasing behavior by our customers than what we experienced in 2008. The marketing campaign begins on September 1 each year and 2008 enrollment incentives favored third quarter purchases. In the US., K9 3Dx and 4Dx tests continued to represent approximately 75% of our overall K9 SNAP unit testing volume in the quarter and for the year.

As for international, we gained greater awareness for our multi-analyte platform in Europe from successful marketing efforts in Germany and Spain that resulted in double-digit growth for our K9 franchise for the year. In addition, in the Asia Pacific region we saw double-digit growth in heartworm testing. Though these markets are much smaller than our North American market, we are pleased to see this growth. In the feline market, the SNAP Feline Triple Test for feline leukemia virus, feline immunodeficiency virus and feline heartworm is now being used by about two-thirds of our core feline accounts across the US. However, the feline market continues to struggle based on our data and what we have heard from others in the industry. The frequency of cat visits to the vet are about 50% less than for dogs and feline visits are down year to year more than K9 visits. It appears to us that cat owners are more economically sensitive than dog owners when it comes to pet healthcare spending.

All of these dynamics contributed to an overall growth rate of 1% for Rapid Assay for 2009. This is organic growth further normalized for distributor inventory changes. US distributor inventory levels for instrument consumables and Rapid Assays averaged 3.8 weeks at the end of the year based on forward-looking demand. This is relatively on par with the level at the end of the third quarter and closer to the high end of our customary three to four-week range. Our laboratory and consulting services with revenues of $75.4 million had organic growth of 7% in the fourth quarter compared to 6% in the third quarter. Almost 80% of this revenue growth was the result of higher testing volume with the remainder due to price increases.

Higher testing volume was driven primarily by new customers and new specialized tests. During the year we expanded our global lab network to 44 labs, up from 41, at the end of 2008. In addition to expanding our menu of specialty lab tests, we continue to leverage our full IDEXX offering of integrated diagnostic service, product and information management offerings to promote new business in all geographies in which we operate. Lab margin improvements are a key factor in our efforts to expand our total Company operating profit margins over time. In addition to the volume leverage we are gaining from revenue growth in our labs, during the quarter we continue to make progress on implementing lean and efficient sample processing in our international core labs. Similar initiatives have proven to be successful for us in reducing costs at our US locations.

Our Practice Information Management and digital Digital Radiography systems with revenues of $19.5 million grew organically 1% in the fourth quarter. The growth rate is not indicative of the strength of the performance for this product line in the quarter due to the difficult comparison total fourth quarter of 2008. As we had noted at the time, we entered the fourth quarter of 2008 with a sizeable book of orders in anticipation of the introduction of our next-generation computed radiography system in that quarter. As a result we recorded 15% organic growth in fourth quarter last year. In Q4 '09 we had a record number of orders placed for our digital systems which will give us continued momentum going into 2010. The sustained solid performance in this product line is the result of favorable industry dynamics, our broad product portfolio and the value customers place on the seamless way our digital and practice management systems provide work flow efficiencies and revenue capture for their practices.

Production Animal Services sales, of $23.4 million, grew 5% organically in the fourth quarter. We believe the relatively strong performance in Q4 versus Q3 may have been in part due to a shift of timing of some orders between the two quarters. In Q4 we saw increased volume across multiple cattle products in Europe and Asia Pacific including BSE. We are gaining new business for that test that is helping to mitigate market trends toward lower pricing and lower testing volumes. As you may recall in the third quarter, Production Animal Services operating profit margin of 6% was lower than we had seen in prior quarters. We anticipated -- as we anticipated in Q4 -- we returned to an operating profit of 27% that is more line with recent history due primarily to higher sales volume.

Our water segment had sales of $18.5 million for the quarter which translated to 3% organic growth. This is up from the flat third quarter and 2% growth for the full year. We continue to see signs in the fourth quarter that the economy was impacting certain market segments of the water business where testing is not driven by regulation. As with our other businesses, we have planned for only very modest recovery in 2010.

Looking at the rest of the P&L, the gross margin at 49%, was right in line with our thinking for the quarter. The stronger than anticipated revenue performance for capital equipment with relatively lower gross margins was balanced by strong revenue performance in Production Animal Services with relatively higher gross margins. As I noted up front, the $2 million pharma milestone payment we received in the fourth quarter was netted against G&A expenses. Accordingly, operating expenses when normalized for this item were 33.6% of revenues. This was essentially in line with our expectations and quite consistent with the spending profile we saw in the second and third quarters. As I also noted earlier, our effective tax rate for the quarter, up 29.5%, was favorably impacted buy about 1.5 points by the close out of an audit in Europe. This contributed $0.01 to earnings.

Turning to the balance sheet and cash flow, we ended the quarter with $107 million of cash and $119 million of debt for a net debt position of $12 million. Our inventory balance of $110 million was down $14 million from the balance at the end of the third quarter. While about half the reduction is due to the timing of receipt of our last chemistry slide consumable order falling into the first quarter of 2010, we are pleased to see that our efforts to manage down inventory combined with strong fourth quarter sales have enabled us to achieve the objectives we set out for the second half of the year regarding lowering inventory levels. We will maintain our focus on this component of working capital in 2010. DSO at 39 days remain in good shape and our free cash flow was $45 million or 146% of net income for the quarter, and 105% of net income for the year.

Looking forward to 2010, we now project full year revenues of $1.1 billion to $1.115 billion as slightly stronger organic growth is offset by a modest reduction in the forecasted benefits from currency. On a reported basis, our revenue guidance implies 7% to 8% growth which translates to organic growth of approximately 5% to 6%, as we adjust for the 1% anticipated benefit of currency year to year, and the nearly 0.5% of benefit from acquisitions made in 2009. This compares to our initial 2010 guidance of 6% to 8% reported growth and 4% to 6% organic growth and an approximately 2% benefit from currency year to year.

The incremental revenue from Catalyst instrument sales which contributed nearly two points to 2009 organic growth will play a much less prominent role in 2010 organic growth. Increases in growth are expected in virtually all other product and service areas with the exception of Rapid Assay, which we expect to be relatively flat with 2009. As noted earlier, we project that the economy will provide only a very small benefit and the remaining growth will be driven by the momentum from innovations with products, services and integrated information management offerings as well as hire growth internationally. With regard to the profile within the year, we anticipate stronger revenue growth in the first half and particularly in the first quarter, reflecting easier comparisons to weak capital sales in the first quarter and first half of 2009. Comparisons get more challenging as we move through 2010, reflecting the gradual improvement in capital sales in the second half of 2009.

Benefits from currency changes are also anticipated to be greatest in the first half of 2010 as the US dollar was strong vis-a-vis our basket of currencies in the first half of 2009, and gradually weakened in the second half. We expect full year gross margin to be approximately 51.5% to 52% for the year, 50 to 100 basis points above the 2009 full year rate, reflecting the benefits from cost efficiencies related to moving down the learning curve on Catalyst, and for labs, volume leverage and productivity gains from lean initiatives, sharing of best practices, and leveraging of global purchasing initiatives. Operating expenses should average out to be approximately 34% of revenues for the full year, translating into an operating margin of 17.5% to 18%. We expect operating expenses will be highest in the first quarter -- 100 basis points or so above the full year average due to the timing of commercial activities such as trade shows and sales meetings. This spending pattern is consistent with the last several years.

We expect the tax rate to be 31.5% to 32% for the full year, 150 to 200 basis points above the full year 2009 rate, due primarily to the expiration of the Federal R&D tax credit at the end of 2009. An extension of this credit, should it occur, would reduce our full year rate by approximately one percentage point and increase EPS by $0.03 to $0.04. Net interest expense is anticipated to be $2 million to $2.5 million, and the weighted-average share count for the year is expected to be approximately 60 million. All this leads to us tighten our full year EPS projection to $2.20 to $2.25, compared to our initial guidance of $2.15 to $2.25 projected in October. This new guidance reflects a currency headwind of $0.01 versus our prior guidance associated with the weakening of the Euro versus the US dollar. Our guidance provided today assumes the Euro at $1.40, compared with an assumed rate of $1.45 in October. Rates for the pound and the Canadian dollar are unchanged from our assumptions in October with the pound at $1.60, and the Canadian dollar at $0.95. Every 1% strengthening of the US dollar vis-a-vis our basket of currencies reduces revenues by slightly more than $4 million and operating profit by about $750,000 on an annual basis.

As for the balance sheet, we project DSO to remain at approximately 40 days and inventories to be approximately at year end 2009 levels. Capital expenditures are targeted to be $45 million, down slightly from the $51 million that we spent in 2009. We project free cash flow to be approximately 110% of net income.

Now I'd like to turn it over to Jon for further comments on the business.

Thank you, Merilee, it was a strong quarter given the economic backdrop with higher than expected revenue from organic growth of the business, strong earnings, great cash flow and currency tailwind. The business has good momentum, particularly in capital placements going into 2010, which is exciting given the fact that we aren't getting a whole lot of help from the economy just yet. Yes, the Q4 compares to Q4 2008 in vet traffic were a bit easier as we expected but there is still not yet much consumer demands growth coming from the pet owner.

We are generating growth through our innovations and our product portfolio that comes from our sustained investment in R&D and investments in sales, marketing and distribution to bring our products to market -- to the market -- through consumer education and customer support. In 2009 we continued to invest in R&D, focused on diagnostics and information technology at the same level of $65 million as in 2008 in those areas. A highlight in the quarter was our success in placing chemistry analyzers. The 763 Catalyst Dx installations in Q4 was more than a 60% increase over Q3, and this pickup was equally balanced in North America and Europe. It was also about 40% more than Q4 2008.

In fact, if you add our other chemistry instrument, VetTest, that serves the lower entry cost or value segment of the market, our total chemistry placements for the full year 2009 were about 3500 the highest in the Company's history dating back two decades and 20% more than the already strong 2008. The year 2009 ended up being a really outstanding year in terms of placements of these high consumable demands generating analyzers, even during a year of great economic challenges around the world. As I had mentioned in the Q3 call we made several modification to Catalyst software and hardware that improved the customer's experience and these along with other improvements that we've made during the course of 2009 had a very positive effect on word of mouth and our global commercial organizations enthusiasm for the instrument.

Catalyst DX is the franchise instrument within the IDEXX VetLab Suite of blood and urine analyzers that enable what we refer to as real time care. Catalyst DX breaks down many of the barriers to just running the blood work now, with its unprecedented ease of use, time to result, accuracy, complete, yet highly flexible menu and throughput. We saw something interesting happen in Q4 with respect to the US customer segmentation. We also knew that Catalyst would appeal to mid to high volume customers and indeed that is what we find. However, we are also finding that Catalyst was appealing to lower volume practices.

In Q4, we were routinely selling the instrument to one doctor practices in North America, much to our surprise. We did not fully expect this success and these customers obviously don't generate the ongoing consumable volumes that multiple doctor practices do. However, it appears that the appeal of Catalyst is broader and deeper than we thought. While these customers do not value the instrument's throughput, to them the innovations in ease of use and menu are valued in and of themselves. The conclusion is that the instrument will have more long-term runway than we originally thought.

We have about 32,000 chemistry analyzer customers globally including 2,800 that are Catalyst customers now at the end of 2009. In the next six years or so we expect to place as many as 15,000 additional Catalysts. This of course is a very rough projection. Because of Catalyst's unique value to medium and hire volume customers we expect these placements will also represent a majority of the consumables usage in the market. As a result of our continuing customer experience improvements and our growing experience in selling the instrument around the world we expect to place about 2,400 Catalyst instruments worldwide to customers in 2010 up 17% from the already strong 2,046 units placed in 2009.

We are excited about the real time care story and how it will advance in 2010, as I mentioned we are making other improvements in efficiency and reliability to Catalyst DX, to create further customer confidence in their ability to use this equipment to run their blood work real time. We are also advancing the software capability of IDEXX VetLab Station along with a number of customers who are connected to IDEXX with SmartService. In fact, we are installing as many as 100 new SmartService customers a week. We are now routinely able to upgrade a SmartService customer's Catalyst DX service through the Internet, advancing our ability to provide an exceptional customer service experience.

We are also introducing at this time IDEXX InterLink connectivity with major third party practice management software vendors. IDEXX InterLink saves customers a dramatic amount of time, ensures the blood work report is accurately placed in the medical record and automatically captures the charge of that blood work on the customer invoice. If you've combined the percent of customers who have used IDEXX's Cornerstone Practice Management Software with the third party InterLinks that we are launching in this quarter, this totals to roughly 70% of customers in North America and we can offer this highly advanced level of IDEXX VetLab Station integration. This innovation has really caught the attention of our customers in 2010. So we continue to knock down the barriers to real time care. In addition to the advancements already mentioned, we expect to roll-out four other advances, some larger, some smaller, for the IDEXX VetLab over the course of 2010. We will let you know about these as they are ready to come to market. Suffice to it say that we expect to continue to build on the momentum established in the fourth quarter with Catalyst DX and more generally IDEXX VetLab instrument placements. Which will help accelerate growth of our instrument consumable revenues.

Merilee has mentioned a 15% growth we see in instrument consumables and the profit from those consumables from our customers who upgrade to VetTest, from VetTest to Catalyst. Many of you have asked appropriately so I might add if the testing increase we see with Catalyst customers comes at the expense of customers sending their blood work to their reference lab. While the reference lab with its typical twice a day pickup does provide the alternative way of computing the pet's blood work we see that more of the growth comes from expanding the market by capturing testing opportunities in the vet hospital that were otherwise missed due to the inefficiencies in the practice. And Catalyst DX brings some new or easier in-house protocols such as urine testing with urine protein-creatinine ratio, electrolytes or single chemistry rechecks that were not previously completed because they may have been difficult or impossible to run.

I also wanted to provide an update on our innovation in the reference labs. As many of our investors know we are very excited about our new cardiac marker, Cardiopet proBNP, offered by our reference labs to radically advance the diagnosis of cardiac disease in the dog and the cat. Strong interest in cardiac disease is evidenced by the overflow crowds we saw in the continuing education sessions at the North American Veterinary Conference, the largest annual veterinary conference in the world, which was actually just completed a couple weeks ago. We also see significant growth in the test volumes in our reference labs in North America for Cardiopet proBNP although the numbers still remain small overall. Over the course of 2009 we've been working hard to continue to refine our medical message around Cardiopet proBNP and to align it consistently to cardiologists and other key opinion leaders. We have only begun the effort to education and help veterinarians incorporate Cardiopet proBNP in their routine protocols. As a result of this work in 2009 we've developed new internal and external data generated to refine our cardiac medical messages, education and interpretive criteria.

Specifically our two major areas of focus for the clinical tests are, first, testing for dogs with murmurs to determine if clinical signs are related to the heart and, two, to find hidden heart disease in apparently healthy cats. Thus, for the murmur dog and all adult cats, Cardiopet proBNP is a key medical utility. The measurer dog and the apparently healthy cat obviously present a very large and important market opportunities. Our experience is that introduction in and adoption of a new medical message takes good medical marketing and time to achieve market penetration. So we see Cardiopet proBNP as a long-term consistent driver of growth in our global reference lab business.

While cardiac is likely the most important specialty test we will be offering in 2010, it is by no means the only, as we have developed a strong and growing portfolio of innovations in the tick-borne disease, pancreatitis, molecular diagnostics and other areas that allow our reference labs to provide advanced medical value to our customers worldwide. Most of these diagnostic protocols, too, are early in their adoption curve. And certainly we are very pleased with the results in the reference labs and consulting services line of business in Q4, which reached revenues of a little over $75 million worldwide with 44 lab locations. We have achieved some good margin growth in these service offerings in addition in 2009.

I would like also to mention the growth of our international revenues at IDEXX in the fourth quarter. Our European Companion Animal Group achieved almost 10% constant currency growth on the topline and very nice margin expansion in Q4. Growth was broad-based across the Companion Animal Group lines of business represented in Europe. IDEXX's Asia Pacific operations had growth of 30%, led by China with more than 100% organic growth for the quarter. We had revenue growth in many different lines of business in various countries. China growth was led by our production animal services and dairy businesses.

Finally before we move to the Q&A I wanted to let investors know that we have received a communication from the Federal Trade Commission that they are conducting an investigation to determine whether IDEXX is engaging in unfair competition in violation with Section 5 of the FTC Act through pricing or marketing policies for Companion Animal Products or services. The FTC is clear that the investigation is not an indication that the FTC has concluded that IDEXX has violated Section 5, We are of course cooperating fully with the FTC and intend to be fully responsive to any requests for information that they may give us. Based on our preliminary discussions with the commission we believe they are looking at certain aspects of our US distributor agreements and our in-clinic combination tests for feline retro virus, although the scope of their investigation could extends beyond these matters.

I might comment that we are confident that we are in compliance with antitrust laws. Our investors know that we have been required on two occasions to defend ourselves in Federal Court with allegations that we have violated antitrust laws. In both cases, one in 1998, and another in 2008, we were successful in having these claims dismissed on summary judgment with both dismissals upheld by Federal appeals courts. These cases related specifically to some of the matters that appear to be the focus of the FTC -- namely certain terms of our agreements with distributors and our combination tests for FIV and FeLV in our feline SNAP. We believe these court cases are good precedent even if the FTC may be applying a different legal standard under Section 5 of the FTC act than the courts applied under Section 2 of the Sherman Act.

We believe the basic consideration of any analysis in this nature is the competitiveness of the market. I think most investors who know this market would agree with our characterization that our market for companion animal diagnostic solutions is very competitive. There are a number of very strong capable and successful players who provide our customers with choices in diagnostic solutions through both reference lab offerings and in-house methods and with competitive pricing. Our strategy is one of technological innovation which expands the market, advances the practice of veterinary medicine and creates new demand. We of course cannot predict with any certainty when or how the investigation will resolve. However, we are confident we will be able to demonstrate to the satisfaction of the FTC that we are not violating antitrust laws. I base this confidence on our knowledge of the market, our ongoing attention to anti-compliance -- antitrust compliance -- over the last decade, our success in previous cases and a comprehensive review of the current FTC inquiry as we understand it with our outside counsel.

Let me conclude our up front markets before Merilee and I open up the call to Q&A. We've ended the year and entered the new one with good momentum in our businesses as a whole during a difficult economic period. And while our guidance for 2010 reflects expectations of only a very modest economic recovery, we expect to grow the businesses domestically and internationally by bringing innovations to the market. We expect to achieve margin expansion for IDEXX through our two largest lines of business that together make up 60% of the Company's revenues. The instrument and reagent business we called the IDEXX VetLab business and the global reference lab business.

So at this point, Cynthia, we would like to open it up to questions and answers.

Thank you. (Operator Instructions) Our first question will be from the line of Ryan Daniels from William Blair. Please go ahead.

Good morning, it's Kristina Blaschek for Ryan today. Congratulations on a strong quarter. To start, can you tell us a little bit more about the strength in fourth quarter instrument placements? I guess specifically the increase in the Catalyst Dx demands and perhaps any sales force, your sales force gaining momentum during the quarter?

Yes, thank you for the question, Kristina. That's exactly what really happened is we are starting to get going now. We're starting to get going now, we have a good instrument, a good instrument experience. Of course we always knew the design of the instrument had -- was going to be innovative and really advance the customer's practice of real time care. Really everything has started to come together so we see it as the beginning of a good trend going forward, which is the basis for our projection in 2010, of 2,400 Catalyst placements. I might note that a year ago, we were all pretty concerned about the economy but at that time we projected 2,000 Catalyst placements over the course of the year and while the profile of placements was gaining momentum over the years as I would say, we actually did end up exceeding that estimate.

Great. Thank you. Then you recently launched a new version of the VetLab Station with a much larger screen and better touch functional. Can you share with us any feedback if you've received from any customers so far on this or is it too early.

Actually, thank you Kristina for bringing that up. I didn't even bring that up in my opening comments but we did increase the size of the touch screen from 10-inch to 15-inch. I think it's well appreciated by our customers.

It actually is also a lower cost configuration for us. And one of the reasons why we are -- part of our plan to continue to lower the instrument costs as we come down the learning curve. So it's a better customer experience. Our sales force is pretty excited about it. It was nice to have that, I think we had half a dozen of those around the most recent North American Veterinary Conference to show customers in our booths and around the booths of other companies who we collaborate with or are distributors, and it's just part of continuing to advance the IDEXX VetLab capability.

Great. That's helpful color. One more if I may. Can you remind us what's included in your other business segment?

Yes, Kristina, that would include our dairy business and then the OPTI Medical business which is focused on human healthcare diagnostics for blood gases, primarily.

Okay. Great. Thank you.

Thank you. (Operator Instructions) We will go to the line of David Clair from Piper Jaffray. Please go ahead.

Hi, good morning everybody, how are you doing?

Good morning, David.

My first question here is on the lab business. You mentioned that you are seeing customer gains. I was hoping you could give us some color on US versus OUS customer gains.

David, we do thing of the lab business as a global business and I think we've done a good job in starting to generate sharing of best practices and global operating synergies and purchasing leverage all which are helping us not only to bring a more competitive lab offering but one with more efficient cost. We don't break out the growth in individual markets but I think it is -- suffice to it say that we have growth in both the US business and outside the US business.

Okay. And then just real quickly on the FTC investigation, you mention you've been down this road two times before, I was just hoping you could give us some commentary on how long it took to resolve the other two cases. Just what -- are you compiling information for them right now or what stage are we in.

Yes, actually those cases did take one to two years to go through. In that case it was a judicial process. In this case it would be an administrative process with the FTC. It's unclear whether it would ever actually go beyond an investigation because I think we are still in the early stages of their data gathering and us responding and educating them to the nature of the competitive dynamics of the industry.

Okay. And then obviously we had a very nice instrument quarter. I was just hoping you could give us some commentary on what you're seeing as far as the appetite for capital equipment in the channel here? I know it sounds like Catalyst Dx is going very well but maybe LaserCyte, it sounds like volume is down a little bit there, just general commentary.

Yes, first of all to your second question to LaserCyte, I think our sales force did move many of their attention to Catalyst from LaserCyte. As you know we've been in the market with LaserCyte since 2002. It's still the most innovative hematology analyzer on the market. We continue to make improvements to it and have been selling it for seven years and Catalyst is pretty exciting. So a lot of our customers of course do operate both with LaserCyte and Catalyst. And I think the growth in Catalyst did come at some reduction in units and average unit price on LaserCyte.

What I would say more generally about the capital equipment business is, we are very good at placing equipment with customers who are interested in investing in their practices. If you think about it, I mentioned we have 32,000 VetTest customers. Obviously that's not the entire market. That's only those who are our customers for chemistry analyzers around the world and we placed 3,500 VetTest in Catalyst instruments in 2009. That's roughly 10% of our own portion of the market let alone the whole market. So we don't need to convince every practice. There can be half the market that isn't interested or two-thirds or three-quarters of the market that's not interested in any particular year in upgrading their -- investing in capital equipment and we can have a very, very successful year in terms of Catalyst placements.

Okay. Then just one last one here. It looks like income from operations on the other line was up pretty significantly year over year. And for the full year as well. I was just hoping you could give a little bit of color there as well.

Yes, David, it's Merilee. With regard to the quarter in particular, the driver was really, you could see there was a pretty nice improvement in margins. And it was really driven by just favorable manufacturing and efficiency. Remember you are dealing with relatively small numbers here.

Thanks a lot, congratulations.

Thank you, David.

Thank you. Next we will go to the line of Jonathan Block from SunTrust. Please go ahead.

Thanks, guys, and good morning. I will apologize in advance by asking questions that were already asked or stuff you addressed. Sorry, just jumping between calls.

The first one, would just lead to the Catalyst, Jon, very good numbers there and I just want to make sure, all those sales to the end users, in other words, are you still just using your sales force for Catalyst or have you turned to distributors.

That's a very good point. These are placements in a vast majority. There might be a very few in some remote territories of Europe. Outside the five port countries, where we are direct. Of course, we sell direct instruments in North America. The vast majority of these are placements with customers and in fact we will not recognize a revenue unless we have not only delivered the instrument to the customer but completed the initial set up and training. So they are customer placements.

Okay. So they are customer placements. The placements are within that, I think it's the 2,073 number.

Let's see 2,046.

I'm sorry, 2,046 number.

Those are, over 95% of them, I can't tell you that every single one, because we do use some distributors in the smaller countries in Europe. But the vast majority of them are in customers, being used.

Right. We just heard that I think you guys started turning to some US distributors in the fourth quarter for Catalyst. Is that correct?

No, that is not correct.

Then just on the Rapid Assay, down 2% for the quarter like you said clearly there was some loading -- I guess the previous quarter, but maybe if you could speak to us on pricing, I guess specific to heartworm. Have you guys lowered price -- Avax was out there selling them for $3.50 if you order 100 or are you still able to hold price in that type of environment.

While Merilee is looking for the number I think we actually did have -- when you adjust for our distributor inventories organic growth of 2% in the quarter for Rapid Assay, obviously the heartworm only business is a very competitive business. I think that's a fair characterization. It's always been a competitive business. We had a new entrant now who is being very competitive. And our strategy is to upgrade customers and convince them of the value of parasitic disease screening -- tick borne added to heartworm -- but obviously there are some customers and some geographies where they choose not to do that either because of their own internal practices or because there isn't the -- a large presence of ticks in the dog population.

Okay. Maybe two more. The FTC investigation that you mentioned and it sounds like you've run into this before -- you mentioned twice before dismissed on summary judgment? What are they going after this time? In other words, does this have more teeth in your opinion, obviously it's important, does this one have more teeth, is anything different that they're bringing to you the previous two times.

Of course, the previous two times weren't FTC, they were defending third party suits. And it's still early in the investigation and the only thing I would say -- the difference here is that they are using a different area -- Section 5 of the FTC Act. But the fundamental issues around antitrust compliance we think are similar. Although this is a different part of the act, if you will.

Okay. Last one for you. I think David asked this one before me, I'm sorry, I was jumping on at the end, the $3.6 million from EBIT from other income, what's that from?

Yes, Jon, this is Merilee, it is coming largely from just things in the gross margin line and really that relates to manufacturing efficiencies and some favorable manufacturing variances that we had. Just dealing off of very small numbers here.

Okay. But I'm sorry, what difference from past quarters? I guess if you have manufacturing deficiencies why don't we see that in the different line items, like CAG, water, PAS, et cetera.

This does encompass not only our dairy business which we have manufacturing here in Westbrook but this also encompasses OPTI Medical which manufactures equipment and consumables for electrolytes and blood gases for the human market and their manufacturing is in Georgia. So it's a separate facility and there are different manufacturing areas around the Company. So you can have some that are having favorable variances and things and you'll have others won't be experiencing exactly the same things.

I guess the better question would be, is this something that we should model going forward? It's a big change from past quarters.

I think that some of this is just favorable variances within the quarter so I would not model to that extent going forward.

Okay. Thank, guys.

Thank you.

Thank you. Our final question will come from the line of Daniel Owczarski from Avondale Partners. Please go ahead.

Thanks, good morning. Just back to the FTC, Jon, I don't know if you mentioned numbers the test or businesses that the FTC is targeting, how material or what's the size or how big is your exposure there?

Well, to the extent that they are talking about specific product areas, they are less than 5% of our business. And then the other thing are in relation -- in more generally to our distributor arrangements, and that's more how we distribute the product as opposed to the product configuration.

And I guess that was, the follow-up question is that -- is there anything unique about that business or those tests that they are targeting that's different from your other tests and businesses? Why is that singled out?

Well, in the case of the combination test on the feline, we have two products -- two tests there, feline immunodeficiency virus and feline leukemia virus. They are actually the vast majority of what we sell in all forms --a test for both of those because those are both retroviral tests that the key opinion leaders say you should be testing for both. And in the past there hasn't been a competitive offering, so it's hard to really tell exactly what the FTC's concerns are. We are very confident in that area that we are in full compliance with any antitrust law.

Is there any way to estimate how much of your total business would have those characteristics where you don't have any competition out there?

It's perfectly legal to compete with -- to bring new innovations to the market that are patented. That's, if you will, a legal form of having an exclusive arrangement. But I don't think that's what they are really focusing on.

All right. Thank you.

Thank you. With that I would like to turn it back over to you, Mr. Ayers for any closing comments. Thank you everybody for joining the call. I also want to congratulate our employees who are on the call, certainly the completion of the year. It certainly was a very challenging year economically. We are proud with the results that we've achieved. We are actually proud that we did not contribute to the US unemployment in 2009. We actually grew our US employees a little bit behind the growth of our business.

And were also a good exporter, approximately a quarter of our revenues are exported out of the US, international, and I think those are accomplishments for our Company to be proud of along with the financial and customer accomplishments. So we thank everybody for joining the call and we will update you all at our next call in April. Thank you.