愛德士 (IDXX) 2010 Q4 法說會逐字稿

Good morning, everyone. And welcome to the IDEXX Laboratories fourth quarter 2010 earnings conference call. Just a reminder, today's conference is being recorded. Participating are Jon Ayers, Chief Executive Officer, Merilee Raines, Chief Financial Officer, and Susan Ostrow, Director of Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding management's future expectations and plans, and IDEXX's future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as, expects, may, anticipates, intends, would, will, plans, believes, estimates, should, and similar words and expressions. 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, 2010, and Form 10-K for the year ended December 31, 2009, in the section captioned risk factors, which are on file with the SEC and available on IDEXX's website, IDEXX.com. In addition, any forward-looking statements represent IDEXX's estimates only as of today, and should not be relied upon as representing the Company's estimates as of any subsequent date. The Company disclaims any obligation to update or revise any forward-looking statements in the future, even if its estimates or expectations change.

Also during this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP. A definition and reconciliation of these non-GAAP financial measures to the related GAAP financial measures is provided in our earnings release, which can be found on our website, IDEXX.com. Finally, we plan to end today's call by 10 AMEastern and in order to allow broad participation in the Q&A, we ask that each participant limit his or her questions to one, with one follow-up as necessary. We do appreciate you may have additional questions, so feel free to get back into the queue and if time permits, we will be happy to take your additional questions. I would now like to turn the conference over to Merilee Raines.

Good morning. Thank you for joining our call today. I like to begin with a quick overview of our fourth quarter results. In our press release this morning, we reported revenues of $283.8 million, a year-to-year growth of 5%. And diluted earnings per share of $0.62, a growth of 22%. Revenues, excluding a roughly $2 million unfavorable impact of currency, were about $5 million above our thinking at the time of our October call, driven primarily by stronger than anticipated performance in our livestock and poultry diagnostics and lab services businesses.

Earnings per share were about $0.07 above our thinking in October. EPS included two items not anticipated at the time of our October call. $0.04 from a lower than planned tax rate that reflects both the extension of the R&D tax credit, combined with modest benefits from the expiration of tax statutes of limitations in certain jurisdictions, and a $0.02 benefit from a $2 million milestone payment related to the sale in late 2008 of our feline diabetes therapeutic. EPS, excluding these items, were about a $0.01 above our thinking in October, and $0.02 of earnings benefit from stronger than anticipated revenues was partially offset by about $0.01 of negative impact from a stronger dollar than assumed in our guidance.

Fourth quarter revenues grew organically 6%, after adjusting for a 1% unfavorable impact from currency. The fourth quarter organic growth is up a point from what we achieved in the two previous quarters, and organic growth for the full year was also 6%. The impact of the economy on our businesses continues to be a focus for us and for our investors. So in addition to anecdotal information from our commercial organizations, and external information we can glean from our markets, for the US,that market in particular, we continued to analyze patient visit volume and practice revenues from data derived from a subset of customers using our practice management system.

In the fourth quarter, patient visits were flat year-to-year, and practice revenue growth increased about 3% year-to-year. Fourth quarter metrics compare favorably to those for the first nine months of the year, of just over 0.5% of decline for patient visits and just over a 1% increase for practice revenues. So we saw an improvement in trending, albeit modest, as we exited the year, particularly with regard to practice revenue growth. This helps reinforce the anecdotal observations we have gathered from various sources, that the market is stabilizing, and is perhaps poised for some improvement over the course of 2011. As we stated last quarter, we continue to believe that our businesses will see only a modest and gradual benefit from a slowly improving economy. This assumption holds true across our businesses and geographies generally, with the exception of our Asia markets, where the economies have been stronger.

Turning to revenues by business line, our instruments and consumables, with fourth quarter revenues of $95.9 million posted organic growth of 4%. When further adjusted for changes in distributor inventories of consumables, the growth was 6%. Deconstructing this line into its components, revenues from sales of instruments in our IDEXX VetLab Suite, at $28 million, grew 12% organically in the fourth quarter. Regarding unit placements, our combined fourth quarter placements of Catalyst, VetTest, ProCyte and LaserCyte, the primary drivers of follow-on consumable revenue, grew 7% year-to-year.

As in the third quarter, Catalyst placements were a little light from our expectations. Placements for the quarter, at 728, brought the full year total to nearly 2,300 and the install base to almost 5,100. Full-year placements of Catalyst and VetTest totaled just over 3,800, an increase of 8% over 2009. We believe that the modestly lower-than-anticipated Catalyst placements were largely due to sales force and customer focus on ProCyte, our new hematology platform.

We placed 295 ProCytes in the fourth quarter, bringing the total since launch in the third quarter to 449, which is handily above our expectation at the time of launch of 250, and our revised projection in October of 400. Catalyst and ProCyte are also complementary in addressing the clinic's needs for accurate, reliable, easy-to-perform testing of the most frequently desired blood parameters within the time window of the patient's visit. This is validated by the fact that over 90% of the ProCytes sold to date were either to customers who already owned a Catalyst, or who purchased a Catalyst alongside ProCyte.

Placements of IDEXX VetLab Stations, the management system for the VetLab Suite, were nearly 1,200 in the quarter. And SmartService installations were approximately 1500. The install base for IDEXX VetLab Station now stands at approximately 12,000,and SmartService at about 7,550. These components of the VetLab Suite help our customers turn test data into more insightful information to share with their clients. They enable us to remotely monitor equipment performance, and offer protocol-based price incentives to our customers, to broaden their testing done in-clinic to mirror test panels commonly requested at the reference lab. So the capabilities of our analyzers, IDEXX VetLab Station and SmartService, work in concert to increase utilization of consumables over time, and enhance install base loyalty.

Instrument consumable revenues of $57.3 million grew organically 1%, or 4% when further normalized for changes in distributor inventories. This normalized growth is consistent with what we have experienced throughout 2010. We expect to see an uptick in instrument consumable organic growth in 2011 from 2010 of about 250 to 300 basis points, primarily as a function of both increased utilization of analyzers as just discussed, and an increasing install base of analyzers.

With regard to install base, Catalyst and ProCyte placements to new and competitive accounts will be the driver. In the fourth quarter of 2010, approximately 30% of the Catalyst placements were to new and competitive accounts,and the comparable statistic for ProCyte was about 20%. In the fourth quarter our rapid assay sales of $31 million grew organically year-over-year by 3%. When further normalized for changes in distributor inventory levels, and the impact of certain marketing programs, revenues were flat for the quarter. This performance represents an improvement from the normalized 2% decline we saw in the third quarter and the first half.

We continue to see commercial challenges in two primary areas. The first is price, particularly in the UScanine market segment, which remains competitive. Despite a competitive market and increased price sensitivity in some areas as a result of the recession, our customers continued to appreciate the value inherent in our differentiated testing platform for canine heartworm, together with tick-related diseases. This is supported by the fact that sales of our multi-analyte SNAP 3 and 4Dx continued to represent over 75% of our canine volume for the quarter. Additionally, our lab 4Dx offering demonstrated strong double-digit growth for the quarter, and for the year.

The second challenge is the market for feline testing. As we have discussed in the past, feline visits have been considerably more negatively impacted as result of the economy, and lengthening vaccine protocols that reduce annual feline exams. The reduction in visits is reflected in testing volume. Partly offsetting some of the head wind in the USis the stronger performance of our tests in international markets,as products such as SNAP 4Dx, SNAP cPL for canine pancreatitis, and SNAP feline triple gained further adoption around the world.

While these markets are much smaller than our USopportunity, we are pleased with their performance. Rapid assay normalized revenues declined close to 2% for full-year 2010. We expect that the first quarter 2011 launch of SNAPshot Dx with a broad menu of tests, combined with other innovations, continued growth internationally, and a more stable USenvironment will result in flat to slightly positive growth in 2011.

USdistributor inventory levels for instrument consumables and rapid assays averaged four weeks at the end of the year, based on forward-looking demand. This is within our usual and customary range. Our laboratory and consulting services business, with revenues of $81.2 million, had organic growth of 8% in the fourth quarter and for the year. Roughly 75% of the year-to-year revenue growth for the fourth quarter was the result of higher testing volume, driven primarily by acquiring new customers. During the year, we expanded our global lab network to 48 labs,up from 44 at the end of 2009. We have also added sample pick-up routes in certain geographies.

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. As we look forward to 2011, we expect that organic growth will accelerate about 1 point, with contributions to volume from footprint expansion that occurred in 2010, increasing penetration of our specialty test menu, and recovering economies around the world, along with modest benefits from price. As you know, lab margin improvements are a key factor in our efforts to expand our total Company operating margins. Operationally, we continue to realize meaningful margin and service level improvements on a global basis, driven by volume leverage, global purchasing scale and a host of other laboratory and logistics process improvements.

Our practice information management and digital radiography systems business, with revenues of $20.8 million, grew organically 6% in the fourth quarter. As you will recall, this area had some softness in the third quarter due in part to open positions in our digital sales force for a portion of the quarter. We ended the third quarter with a strong order book for digital, and anticipated we would get back on track for improved performance in the fourth quarter. And with the help of the beginning order book, very good execution by our commercial organization, and the customary customer focus on capital investments in the fourth quarter, we had a record number of system installations in the quarter. We also had very solid performance with our practice information management systems. Though Q1 2011 growth is expected to be relatively flat, a function of both strong Q4 and first quarter 2010, creating a tough comparison, we expect we will see mid-teens growth in 2011, similar to 2010. This is the result of continued favorable industry dynamics, and our enhancements to our product line.

Livestock and poultry diagnostic sales of $24.6 million grew organically 11% in the fourth quarter, which brought the full year organic growth to 8%. As noted up front, this growth was so much stronger than we had anticipated, and has been the case all year, we saw benefits from higher sales volumes in Germany, where our commercial team is very successful in winning government tenders for bovine testing programs. Looking forward to 2011, we expect organic growth rates in the mid-single digits, down from 2010, primarily because we do not expect the sales volumes associated with the testing programs in Germany to be as accretive to growth in 2011, following the ramp in testing levels in 2010. We also anticipate further declines in BSE revenues, driven primarily by continued price erosion in that very competitive market, more than offsetting share gains.

Our water business has sales of $19.2 million for the quarter, which translated to 4% organic growth. This was in line with our thinking and consistent with our growth for the full year. We expect organic growth in water to be the mid-single digits in 2011, with contributions from North America, where we will have additional volume from accounts gained in 2010, and penetration of the wastewater testing market. We also expect to see growth in our core Colilert testing business in Europe.

Looking at the rest of the P&L, gross margin at 51% was slightly above our thinking in October, reflecting mix benefits from higher-than-planned livestock and poultry diagnostic revenues, combined with additional volume leverage resulting from higher than anticipated revenues in our lab services business. Operating expenses at 33% of revenues were slightly below our thinking in October, reflecting the $2 million milestone payment that I described earlier, which is netted against operating expenses in the G&A line. Operating expenses normalized for this item at 34% of revenues, were in line with our expectations in October. Net interest expense of $340,000 was slightly below our expectations, reflecting a stronger net cash position.

As I mentioned earlier, our tax rate was favorably impacted by about 4 percentage points, due primarily to the retroactive extension in late December of the federal R&D tax credit to full-year 2010 and prospectively for 2011. In addition, we saw modest benefits from the expiration of tax statutes of limitations in certain geographies. These items together contributed about $0.04 to earnings. Share count was in line with our projection in October.

Turning to the balance sheet and cash flow, we ended the quarter with $157 million of cash, and $129 million of debt, for a net cash position of $28 million. Our inventory balance of $128 million was about $10 million higher than our expectation in October, reflecting timing of receipt of chemistry slide consumable shipments. DSO at 39 days are in good shape. Our free cash flow for the quarter was $43 million, or 119% of net income. Free cash flow for the year was 112% of net income.

As we look forward to 2011, we have raised the low end of our revenue guidance range by $10 million, so that the new range is for full year revenues of $1.19 billion to $1.2 billion. Our revenue guidance implies 8% to 9% reported revenue growth, which translates to organic growth of 7% to 8%, given an approximate 1% benefit from currency. Our projected 2011 revenue growth assumes the benefit of approximately 1% from a gradually improving economy and consumer confidence. In our view, the more controllable driver of organic revenue growth acceleration will come from innovations in our products and services that provide increased value to our customers.

We expect full year gross margin to be approximately 53%,about 50 basis points above the 2010 full year rate. The gross margin improvement, though meaningful, would be below the 140 basis point improvement achieved in 2010, due to a couple of factors. First, the expansion in 2010 reflected significant improvements in the cost to manufacture and service VetLab instruments, particularly Catalyst, as we moved down the experience curve. While we anticipate further improvements in instrument costs, including Catalyst in 2011, the magnitude of the improvement will moderate somewhat.

Second, the benefit from reduced depreciation on instruments rented to customers in previous years will decline in 2011 from what we experienced in 2010, by nearly 50 basis points. Rental programs, primarily associated with our VetTest chemistry analyzer, dropped off significantly with the launch of Catalyst in 2008. Accordingly, the value of rental instruments we carry on our books has been declining over the last couple of years. We anticipate the gross margin in the first quarter to be about a point below the full year average, as investments we have made and continue to make to drive efficiencies in our two largest businesses, vet lab and reference labs, provide increasing benefits as we progress through the year.

Operating expenses should average out to be about 34% of revenues for the full year, translating into an annual operating margin of approximately 19%. We expect operating expenses will be highest in the first quarter, approximately 100 basis points higher than the full year average, reflecting the normal timing of commercial activities such as trade shows and sales meetings. We expect the tax rate to be 31% to 31.5% for the full year, which incorporates the benefit of the R&D tax credit for 2011. Our 2011 forecasted rate is 100 to 150 basis points above the 2010, as a result of projected higher state taxes, and no projected benefit from expiration of tax statutes of limitations that we experienced in 2010. Net interest expense should be $2.5 million to $3 million, and the weighted average share count should be down 2% to 3% from the full year 2010 level.

All of this leads us to raise our full year EPS guidance to $2.62 to $2.68, up from $2.55 to $2.65 that we guided to in our October call. This guidance reflects $0.03 of benefit from the extension of the R&D tax credit, net of higher state taxes. The remaining increase to the bottom end of our EPS range incorporates the better-than-expected fourth quarter results, increasing our confidence for 2011. The exchange rates implicit in our guidance today are the Euro at $1.37, the Pound at $1.60. And the Canadian Dollar at parity with the US dollar.

Our currency sensitivity rule of thumb remains the same. Every 1% strengthening of the USdollar 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 be at approximately 40 days, and inventories to be approximately at year-end 2010 levels. Capital expenditures are targeted to be approximately $45 million, andwe project free cash flow to be approximately 115% of net income. Thanks, and now on to Jon for further commentary on the business.

Thanks, Merilee.I was pleased with the quarter and the year for IDEXX I might put into three buckets. First, we had good fourth quarter financial results in the top line,bottom line delivery and free cash flow, all above our expectations. Second, we now believe we are seeing a bit of a turn in our markets, as indicated by the variety of market data and metrics that Merilee referenced, and third, I'm very pleased with the progress we have made in 2010 on a host of initiatives that strengthen the Company and position us well for sustainable growth in years to come.

Our investments are paying off in key areas such as innovation, new products, operating efficiency, international growth and the like. So speaking of innovations, a couple of new product comments. In our IDEXX VetLab point of care instrument consumables line business, which investors is our largest, we saw the second quarter ProCyte placement that exceeded our expectations. The launch has been virtually flawless from instrument design to field performance to commercial execution. We start with the fact that this instrument is exactly what the customer wants in hematology and they are experienced with the instrument and practice is excellent.

We are very successful in placing instruments in large accounts which are attracted to fast turnaround time and good throughput provided by ProCyte, not to mention its extraordinary accuracy. Notably, we are placing ProCyte in veterinary universities in North America and Europe, and these sites give ProCyte strong endorsements to the general veterinary population. When the customer combines ProCyte with Catalyst, our chemistry analyzer, to provide a complete test profile, they find the ease of use, instrument turnaround time, availability and a combination that allows them to get results quickly and easily.

The fast turnaround enables the practice to practice something we call realtime care. This work flow is about completing the entire cycle of bloodwork from blood draw to results presentation, easily within a 20 to 30 typical difficult pet exam. The veterinarian is able to have the results coincident with the pet physical, and discuss those results with the pet owner before they depart. That, in turn, not only delivers an exceptional pet owner experience, what you might call wow, I wish my doctor could do this, but also increases the pet owner acceptance for paying the bill for that and any follow-on recommendations, including any follow-on testing that might be sent to the reference lab.

We continue to add capability to the instrument suite, improve the ease of use, speed and test throughput, and in the fourth quarter, as expected, we introduced the new whole blood separator for Catalyst, which eliminates another step required in all chemistry systems, treating the blood with lithium heparin. We eliminated a step in the workflow by incorporating lithium heparin into our whole blood separator, saving the practice time and the cost of separate tube, otherwise required for every other chemistry system, and the customer feedback has been tremendous. Earlier this month, again as we expected, we introduced a new simpler test for T4, which tests for thyroid disease in cats and dogs on SNAPshot Dx, which also supports our point-of-care value proposition and the realtime care work flow.

This new thyroid test, along with ProCyte, benefits our business model in several ways. First, we have added compelling reasons for customers to choose the IDEXX VetLab as their in-house lab. Second, it will likely increase the number of patient samples run on their IDEXX system. Third, they will likely expand the amount of consumables run per patient, and we were further incentivizing this expansion of the number of consumables with realtime care protocol rebates, and fourth, they increase the loyalty of our customers who use IDEXX analyzers. These four factors are the drivers of instrument consumable growth for IDEXX, and in fact, combined with modest help from the economy, we are very confident in the 2.5% to 3% pick up in instrument consumable growth in 2011 over 2010, referenced by Merilee in her comments.

Speaking of SNAPshot Dx, we introduced in December the ability for SNAPshot to time, interpret, and record electronically our entire core SNAP product line, with the addition of SNAP heartworm. In addition, we have improved SNAPshot's ease of use in running SNAP kits, so of course,you can run the SNAP manually, and that's always been a great experience, but now with the integration on SNAPshot, it allows the technician to have fewer steps and automatically record the charge and improving the financial performance of the practice. Once the customer discovers the economic benefit and efficiency of running their IDEXX SNAP kit on SNAPshot, they put a higher value on their usage of our SNAP kits, and this in turn increases their loyalty to the IDEXX SNAP kit, even in the face of price competition from standalone kits, which we see in the heartworm-only section. To summarize, SNAPshot plays a whole new role in IDEXX in-house testing solution in 2011, both for its improved T-4 and SNAP rapid assay capability.

Moving to rapid assay kits, we are very pleased with the progress we're making on a pipeline of new tests. We're introducing a new SNAP called SNAP fPL in the second quarter of this year. SNAP fPL is the feline version of our already-successful SNAP cPL for canine pancreatitis. Note that the F stands for feline. Many practitioners have indicated that a point-of-care test for cats with vague and non-specific clinical signs is more exciting for canine, because they haven't had any tools to determine whether feline pancreatitis is the issue or not.

Turning to reference labs, just a brief update. Investors know our strategy with advanced proprietary specialized tests through our R&D efforts. And just giving a quick update on cardio pet, which is the most important test, the cardiac marker for dogs and cats, our test volumes in 2010 grew 122% in revenues globally, or 2009, and even by higher amounts in units, and yet we believe we are still in the early stages of adoption of this important indicator of heart health. We just have a lot of other great things going on in IDEXX, but what I like to do is make sure that we have time for ample Q&A. So Cynthia, at this point in time, I would like to open the call to questions.

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

Good morning, everyone. Merilee, maybe just a quick follow-up question for you, as we look to the performance in 2011. I know in the first quarter, you gave some detailed color on the margin performance. I'm looking for a little bit more thoughts on revenue. The reason I specifically ask about the quarter, it looks it's like your toughest year-over-year revenue growth comparison in about three years. I'm curious, will that quarter be a little more under pressure versus 7% to 8%?And then we see that kind of accelerate throughout the year or any visibility you want to provide there for our modeling?

Ryan, I think that is a good point and I guess as we would look at the quarterly progression we might expect that we would see an acceleration in growth as we go through the year.

Great. And then, Jon, one of the things that came out of NAVC was the [Bracky] study and had some pretty interesting data and one of the points there talked a little bit about a lack of consumer awareness about really the value proposition of going to the vet and getting vet services. I was hoping maybe you could talk a little bit about how your realtime care protocols can add that value and how you are using that in marketing to the veterinarians and if that's gaining traction, or if the vets that you talked to really appreciate the need to show the value to customers as much? Any color there about how that could help your sales going forward would be helpful.

Well, thank you. I think that is one of the essential value propositions of realtime care. It's also an essential value proposition of moving to electronic medical records, that our cornerstone software is uniquely able to do. And that is, during the exam, the pet owner gets reports that show exactly what they are paying for. And we believe this increases compliance, meaning it increases the revenue per visit. And it also encourages them to come back for their regular exam or follow-up or whatever the additional works that need to be required with the sick pet. And that is a pretty positive experience. And as you know, with our cornerstone customers they appear to be with a sample set of 300 that we measure, just a random sample of our cornerstone customers, they appear to be growing faster than the industry. And I think that was very consistent with the Bracky report, that was important for the pet owner to see the value, to feel the value. For the value to be palpable to the vet visit, because many of them think vet visits are just about vaccinations, and don't appreciate all of the additional medical value of those visits. So these are all ways to really demonstrate that value.

Great. I know you want to keep it to two questions so I will hop into queue.

Thank you. Next we will go to the line of Miroslava Minkova with Leerink Swan. Your line is open.

Hi, Jon, hi Merilee. Congratulations on the quarter. Let me start with the economy, and what exactly you are hearing and seeing there. You are guiding to about 1% -- you are assuming about 1% improvement in your guidance, but it sounds like just looking at your results, that you put out today,that, that is pretty much already there. Your organic growth rate re-accelerated slightly, and the vet practice revenues are up 3%. Are you assuming that the economy actually gets better through as we go throughout the year? Or basically stay sort of where we are today, a little bit better than it has been the last few months?

Thank you. I'm glad to clarify that. We saw 3% practice revenue growth in our cornerstone data in Q4. That was up from 1.2%, so a little bit of improvement. More in the 1% and 1.5%, that we were expecting. I think we are still very cautious about the economy. We do have a modest pick up in 2011. We were encouraged by the signs that we saw in Q4.

Some of our other businesses also had over delivery, such as livestock and poultry diagnostics business in Q4, that helped our organic growth, and that business tends to be a little bit more up and down. It can have really good quarters and it can have flat quarters depending on eradication programs around the world. They have done a great job executing. I think that's probably less due to the economy than just a great execution with the market opportunity. So, I would say that we are encouraged by the signs in Q4. And we would assume that those signs would gradually improve over the course of 2011.

Okay. Great. And my second question, obviously a competitor of yours did announce yesterday that they are entering the reference labs. Help us understand how are you positioning, given that you will have a third competitor potentially, and I appreciate it's small, just a single lab for the moment. But there will be more competition going forward.

Yes, thank you for that question. We do think that the reference lab is an important part of serving the diagnostic needs in the market. We like that business. In fact, Merilee mentioned that we were 48 labs at the end of the year. By next week, we will have opened two more labs, and we will be 50 labs. We like that strategy.

Great. And I have more questions, but I will get back in queue just to be respectful of your request. Thank you.

Thank you. Our next question will come from the line of Jonathan Block with SunTrust Robinson. Your line is open.

Thanks. Hey, guys. I will try to play by the rules. Maybe I can slip in a third. The first one, Jon and Merilee, it was very interesting, the commentary around patient volumes versus revenue growth. Came back a little bit, but to your point, revenues came back more, so a little disconnect there. Maybe if you could speak broadly, what is that coming from, and what does that mean for IDEXX? In other words, if they are coming in and the average bill is higher, is the patient sicker where they need more diagnostic tests or surgical procedures, and how does that flow back to IDEXX? Thanks.

Thank you, Jon. I think it's very, very hard for -- these are our customer's data, and I can only speculate. I do agree with your observation that it seemed like the practice revenue came back little bit more than the visits, and all I can guess is that at least with these cornerstone customers, they are doing a better job communicating the value per the previous conversation of the medical services, and as a result, they are getting greater compliance and better revenue. I'm pretty sure it's not that they are able to have much pricing in this market.

Okay. And then just on the international side, I haven't netted everything through, normalizing for currency fluctuation. So forgive me there. But when I look at your 12 months for December, the international revenue growth was a tad over 8%. It was 3% in the fourth quarter. One of your competitors last night just cited some softness in southern Europe, Spain, et cetera. Just curious, your commentary, internationally what you are seeing from the macro perspective.

I think we are in general, international is a big category. We like what we see international. We actually had a good quarter in Europe, for IDEXX. And we have -- one comment I will make is, that in Europe, we have a direct sales organization in seven countries, and we have been there a long time. It's a very mature sales organization. And I think they are doing a great job in Europe.

Okay, and last one if I can just slip it. In terms of gross margin, in companion animal group, you guys have done a great job there, and if you look at year-over-year, your gross margin is actually expand -- excuse me, the expansion is accelerating, and accelerating throughout 2010, and you--it seems like you are giving somewhat conservative guidance on gross margin in 2011. Any commentary would be appreciated and little bit of a conservative stab out of the gate. Thanks, guys. Nice quarter.

Thanks, Jon. I will take that one. As I indicated, we definitely are very pleased with the margin expansion that we saw in companion animal in 2010. And as we look at that, a big driver of that was really coming down the learning curve in our instrument manufacture. As we do that, and not only are able to reduce the cost of our instruments, the manufacturing costs of the instruments, we have also increase reliability, which then comes in to play in the costs to support the instruments after sales and we made some great headway this year to the point where I think we are in a very much stronger place. So as I indicated, we do expect that we will -- we still have further initiatives that we are going to undertake, but we are going to see that rate of improvement not being as great in 2011 as we did in 2010.

And as well, I do want to call out again that the amortization that we had on rental instruments, really that were largely before the launch of Catalyst in 2008, that amortization is coming down each year. And the impact to our total Company gross margin in 2011 versus what we saw in 2010 is a reduction of benefit of about half a point. There is a little bit of head wind there. And the other thing at a macro level is that if you look at our revenue mix, the areas that are having relatively the highest revenue growth, are the products and services that have relatively lower gross margin. We have a little bit of macro mix working against us at this point in time as well.

Right. Mix is the factor. Just one clarification. I would say that the elimination of the amortization, or reduction in amortization of 2010, means we wouldn't have further incremental benefit in that in 2011.

Got you. Thanks, guys.

Thank you. Next we'll go to the line of Dawn Brock with Kaufman Brothers. Your line is open.

Good morning. I guess two questions. First, based on the data that you collected from the IDEXX position, that plus 3% in revenue growth on flattish office visits, I mean, that's by far the strongest signal we seen in quite awhile. Merilee, Jon, both of you, do you have any color on what portion of that increase is based on more testing, i.e., that you can measure in consumables volume versus pure pricing increases?

I would say that it's probably more volume than price, but it would be speculation on my part in what our customers are seeing.

Okay.

Anecdotal evidence.

Okay, that's fair. Arguably the base of your position to that point are utilizing the IDEXX-- who are utilizing the IDEXX lab suite. Is that definition more testing-focused than the overall veterinary community, as a result of kind of the strong diagnostics focus that you have there, I would assume that we will see strength there or in your base earlier than the rest of the industry, and I guess if I go off of that assumption, my question is, your incremental 1% organic growth assumptions, are you looking more for greater utilization within your base, stronger adoption trends from new penetration? Are you incorporating in that new products or introductions throughout the year? I'm trying to get more color on exactly what that 1% is based on?

The 1% that we refer to -- by the way, all those are going to be factors in probably the order you mentioned, in terms of relative importance. I think what we were saying is, in relation to what we saw in 2010, we would attribute 1% to economy and then the rest to really success in us in the utilization and new customers using our products and services.

Okay. So I guess this is a third but more of a confirmation. Is it fair to say then that this is actually a conservative expectation, this additional 1% based on your pipeline right now?

I think it's the one we are comfortable with. One of the things that we believe is that the return of the pet owner to the practice, it will be gradual. And in some cases, there is a lengthening period of time between when a pet passes away or is abandoned and that prior pet owner gets a new pet. So we think it's going to be a gradual phenomenon. We were certainly encouraged by the small piece of evidence that turnaround is happening in the fourth quarter.

Great, thank you.

Thank you. Our next question will come from the line of David Clair with Piper Jaffray. Please go ahead.

Good morning, Jon and Merilee.Thank you for taking my questions. I guess the first question here it sounds like you are going to be opening up a couple of new reference labs. I'm assuming that those are going to be day labs. Can you maybe give us an update on what we should expect on that front in 2011, and what kind of contribution you are expecting to the overall lab business as a result?

I think that's a good assumption. The two that we referred to, and we're recognizing that our footprint of what will be by next week 50 labs is spread around the world, and I don't know how many continents but several. US, Europe, Asia. And I think we are excited about the momentum that we have in that business. That momentum has a variety of elements to it, would be continued expansion in the geographic footprint of our reference lab line of business around the world, as well as continued adoption of specialized tests, and some, to the discussion we were having previously, at some impact of an improving economy.

Okay, great. Thanks. And then, it's been a little while since we heard anything on the FTC investigation. I was just hoping you could give us an update there.

Yes, David, we don't have any update other than what we said in the third quarter. It's an ongoing investigation. It's hard to predict the timing of when we would have an update. We remain very confident in the compliance of our marketing practices to antitrust law. There is really nothing further to update on in that matter.

Great. Thank you.

Thank you. Next we will go to the line of Mitra Ramgopal with Sidoti. Your line is open.

Hi, just a few quick questions. First, just getting back to the reference lab business. With the announcement of increased competition, are you more inclined to be even more aggressive as you look to expand your footprint there?

I would say that we were very comfortable with our strategy. Our strategy was to provide differentiated value to our customers. I would just say that right now, the reference lab segment of diagnostic testing is very competitive, as is the point-of-care segment. And we just assume that there will be incremental competition, and our strategy is to continue to grow the business through innovation and a different shaded offering. So, I don't think it's really going to change our strategy, if that's the question.

Okay, thanks. And just a quick follow-up again on pricing, just to make sure I understood your comments with the guidance. Pretty much everything you are expecting is going to be volume-driven, really no contribution from pricing.

I think that's true. In large part very little impact from benefit from pricing.

Okay, thanks.

Thank you. Next, we will go to the line of Ross Taylor from CL King. Your line is open.

My first question relates to cash flows and capital expenditures. Can you give any indication looking out over say the next five years, for how long your capital spending rate might remain around that $45 million to $50 million level? Are there any big capacity expansion needs you foresee over the next five years or so.

I would say that we would see-- were a good free cash flow business. We are going to continue to grow the size of the business. I expect that our capital expenditures would grow along with that. I don't expect that we would see anything to the magnitude of the kinds of capital I think we peaked out at a couple of years ago, in relation to the size of the company.

Okay, that helps. And my second question, your large lab competitor also acquired a small chain of animal hospitals one or two quarters ago and I keep thinking it would cause a shift of some lab business out of that small chain of hospitals to your competitor, and I just wonder if you've seen any of that occur yet within your reference lab business.

Yes, we did.

Can you quantify at all what that impact might be in percentage terms or whether it's material to the growth rates you reported.

Ross, we just continue to be pleased with the 8% organic growth so that was all absorbed in that.

Okay. Fair enough. Thank you.

Thank you. We will go to a follow-up from Miroslava Minkova with Leerink Swann. Your line is open.

Thank you for taking my follow-up. Let me talk a little bit about the consumable improvement that you expect in 2011. I think you mentioned something like 2.5% to 3%. Can we maybe -- drew a little bit on how much of that do you think is going to be coming from your account list and across that install base getting larger and people using more consumable on those instruments as opposed to just overall volumes that you might see in the practice.

The latter being economy-related?

Exactly.

I think we would attribute roughly 1% to the economy and the rest to the collection of all of our other strategies to grow utilization and to continue to grow the install base of customers who use our advanced instrument technology.

And that's ProCyte and Catalyst specifically? Or are you including --

The consumables there are, of course, from all of our in-house instruments. ProCyte, and we actually have three hematology systems, LaserCyte and VetArtery, all three of those and then Catalyst and VetTest on the chemistry side, and then as you know we have a variety of other instruments that add small elements to the total VetLab consumable stream. Chemistry is by far the largest factor. And that would be really both from ProCyte and VetTest.

And then the expansion of utilization really comes from having more samples that have a chemistry also include a hematology or include a T-4 test, so that would be the expansion of utilization per patient sample, and given ProCyte and the new T-4 test, which will be available, the new T-4 test will be available toward our install base at the end of the year it was 4,100 SNAPshot DX customers and obviously will be growing in 2011 as we place more systems. Then the growth of ProCyte, those will be factors which we would expect to see some modest contributions to the year-over-year consumable growth from increased utilization per patient sample.

Great. That's very helpful. And finally, any ProCyte placement targets for 2011 that you might be willing to share with us?

Yes. We think 1,000 is a good round number. It is a higher-end system. It's really had a great, great launch.

Okay. Great. Thank you, guys.

Thank you. And with that I would like to turn it back over to Mr. Jon Ayers for any closing comments.

We really appreciate everybody signing in on the call. And I do want to congratulate the IDEXX 5,000 employees around the world that we have on the accomplishments in 2010 and we are pleased as we go into 2011 and that we are working on our purpose, which is to be a great company that creates exceptional long-term value for our customers, employees and shareholders by enhancing the health and well being of pets, people and livestock. That's what motivates us, and we appreciate the confidence that our investors have in achieving that purpose. Thank you very much.

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation, and for using AT&T executive teleconference service. You may now disconnect.