愛德士 (IDXX) 2011 Q1 法說會逐字稿

Good morning everyone, and welcome to the Idexx Laboratories first-quarter 2011 earnings conference call. Just a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Merilee Raines, Chief Financial Officer; and Pete Levine, Director Investor Relations.

Idexx would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of Idexx management may make on this call regarding management's future expectations and plans, and Idexx's future prospects, constitute forward-looking statements for the 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 annual report on Form 10-K for the year ended December 31, 2010, in the section captioned risk factors, which are on file with the SEC and also available on Idexx's website, www.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 of these non-GAAP financial measures is provided in our earnings release, which can be found on our website, www.Idexx.com. Finally, we plan to end today's call by 11.00 AM Eastern, 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 please feel free to get back into the queue, and if time permits, we will be more than happy to take your additional questions.

I would now like to turn the conference over to Merilee Raines. Please go ahead.

Good morning, and thanks for joining us today in this busy and compacted week of earnings releases. First, a quick overview of our first-quarter results. In our press release this morning, we reported revenues of $292.7 million, a year-to-year growth of 9%, and diluted earnings per share of $0.62, a growth of 13%. Revenues were slightly favorable to our thinking at the time of our January call, and earnings per share were about $0.02 above our thinking at that time.

Revenue performance, relative to our expectations, was the net result of a few factors -- somewhat higher sales of instrument consumables, livestock and poultry diagnostic kits, and lab services more than offset slightly lower revenues from instrument placements and rapid assay kits. The $0.02 of earnings favorability were primarily achieved at the gross profit line, the result of favorable product mix and operational efficiencies. As a backdrop to providing specifics on the performance of our businesses, I will share our perspective on the companion animal veterinary market, as gleaned from patient visit and practice revenue data, from a subset of customers using our Cornerstone Practice Management System. Though this data pertains to US veterinary practices, we believe the trends are generally applicable to the European market as well.

In the first quarter, patient visits were down about 0.5% year-to-year, compared to flat in the fourth quarter, and practice revenue growth was up about 2% compared to roughly 3% growth last quarter. Fundamentally, we continue to believe that the market is stabilizing, and will improve gradually over the course of the year. As has been the case for a while, the improvement may be somewhat uneven, given the fragile nature of consumer sentiment to any shocks to the system.

While Asian markets have been generally stronger than the US and Europe, the obvious question going forward is how Japan will recover from the severe challenges they experienced in March. Due to the lateness in the quarter, we did not see a significant impact on our Japanese business in the first quarter, and we are monitoring the situation closely as we go forward. To give you some perspective on the relative importance of Japan to our business, last year revenues from Japan were 3% of our total revenues.

Now let me give you some specifics on our first-quarter results. First-quarter revenues grew organically 8%, after adjusting for a 1% favorable impact from currency. This organic growth is up 2 points from the 6% we achieved in the fourth quarter and for the full-year last year. Our instruments and consumables, with Q1 revenues of $93.9 million, posted organic growth of 11%. When further adjusted for changes in distributor inventory levels for consumables, the growth was 9%. As for the individual components, revenues from sales of our Idexx VetLab instruments, at $19.1 million, grew 8% organically.

Overall, placements for chemistry and hematology instruments, our primary follow-on consumable generators, were essentially flat with the first quarter of last year. While placements of hematology instruments increased by about 15%, driven by ProCyte, combined chemistry placements of VetTest and Catalyst, were down by a comparable percentage year-to-year, primarily driven by VetTest placements internationally, and were a bit light versus our expectation. As in the fourth quarter, we believe that chemistry placements in the first quarter were somewhat impacted by customer and sales force attention to ProCyte. Catalyst placements were down about 5% year-to-year, though the orders taken in the quarter were roughly comparable to the first quarter of last year.

Total placements for ProCyte were 235 in Q1, and, as in the fourth quarter, over 90% of ProCytes were either placed with a Catalyst, or into an account already owning a Catalyst. ProCyte was officially launched in Europe in the first quarter, and is off to a good start in that region, as well as North America. The installed base for Catalyst now stands at 5,533, and ProCyte at 684.

We have noted the increasing functionality and importance to the in-house lab of Idexx VetLab Station, the information management system for the VetLab suite, and SmartService. These offerings help our customers manage and interpret testing information to share with their customers. They enable us to remotely monitor equipment to help ensure optimum performance, and to offer protocol-based price incentives to customers for expanding testing profiles in-clinic to mirror test panels commonly requested at the reference lab. This Idexx VetLab station and SmartService capability increases the value and attractiveness of conducting testing in-clinic at the time of the patient visit. At the end of the quarter, the installed base for Idexx VetLab station was approximately 12,700, and SmartService connections stood at over 8,400.

Instrument consumable revenues of $63.9 million grew organically 12%, or 10% when further normalized for changes in distributor inventory levels. We estimate that this very strong performance was favorably impacted by roughly 2 points by some timing dynamics between quarters. First, it appears that some European orders shifted from the fourth quarter into early Q1, which we surmise was weather-related.

Second, we believe there were some stocking done at the clinic level in both the US and Japan in the first quarter that will represent timing between first quarter and second quarter. The clinic stocking in the US was the result of end-of-quarter programs run by certain distributors. In Japan, we believe there may have been some clinic stocking done out of concern for disruption to delivery schedules post the earthquake. And finally, Q1 included a one-time benefit of our customers converting to a larger package size for our LaserCyte hematology consumables, resulting in an increase of average clinic level inventory for this product.

The quarter's performance reaffirms our projection for instrument consumable normalized organic growth to be about 7%, or 3 points above the 4% we saw in 2010. Drivers of higher instrument consumable growth in 2011 are increased same-store testing as a result of our enhanced product and information management offerings, along with gradually improving patient visit volume, and the growing installed base of analyzers.

With regard to the second point, Catalyst and ProCyte placements to new and competitive accounts are a key contributor. In the first quarter, roughly 40% of our US Catalyst placements were to new or competitive accounts, and the comparable statistic for ProCyte was about 25%. Our first-quarter rapid assay sales of $38.6 million declined organically 3% year-to-year. When normalized for changes in distributor inventory levels, revenues grew 4% in the first quarter.

We believe that 1 to 2 points of growth in the quarter may be attributable to the structure of our seasonal marketing programs, resulting in timing between the first and second quarter. So taking this into consideration, the 2% to 3% normalized growth, as compared to a 2% decline for full-year 2010 and flat year-to-year revenues in the fourth quarter, primarily reflects an improvement in our canine vector-borne disease testing volume growth. As has been the case for a while, our feline offering remains a slight drag on our rapid assay growth, which is reflective of year-over-year declines in feline patient visits, both as a result of the economy and changes in protocols, which lengthen the time between vaccinations. Looking at the full year, we expect rapid assay organic growth of 1% to 2%.

US distributor inventory levels for instrument consumables and rapid assays averaged 3.8 weeks at the end of the first quarter, within our usual and customary range. Our laboratory and consulting services business, with revenues of $89.1 million, had organic growth of 10% in the first quarter. This compares with 8% for the fourth-quarter and full-year 2010. Approximately two-thirds of the growth came from higher test volume in our labs, and the majority of this volume growth was generated by the addition of new customers. Higher price realization contributed the remaining one-third of our first-quarter revenue growth, as we benefited from modest price increases across many of our geographies. We expect the organic growth for 2011 to be consistent with what we saw in the first quarter.

We continue to expand our lab footprint in key markets with the addition of new courier routes and day labs. This allows us to reach more customers, and improve the turn-around time for customers to get their lab results. During the quarter, we opened 2 new day labs, one in New Orleans and the other in London, England, bringing the global lab network at the end of the first quarter to 50 labs across 5 continents.

As we drive our top line growth in labs, we are equally focused on improving our lab operating margin. We continue to find ways to leverage our global operating scale, and we have implemented several technology and process improvements over the past several quarters, which are yielding operating margin expansion. While we have made meaningful improvements in our operational effectiveness and productivity, we believe that there is still significant opportunity for continued margin expansion over the coming years through new technologies, automation, and leverage of our lab infrastructure over higher sample volumes.

Our practice information management and digital radiography systems, with revenues of $19 million, grew organically 1% in the first quarter, consistent with our expectations due to a tough compare. While the demand for digital radiography is still strong, we experienced a slowdown in orders in the first quarter, and therefore enter Q2 with a lower than forecasted book of orders. As a result, we expect that our second-quarter revenues for this product line will be softer than originally anticipated. We believe lingering economic uncertainty is impacting purchase decisions for this relatively significant capital investment, especially among smaller practices.

Our Cornerstone Practice Management system continues to gain traction, reflecting enhancements that improve customer satisfaction on a number of levels, including the software's ability to enable the use of electronic medical records. In total for these product lines, we now forecast high single-digit full-year organic growth, with growth flat to slightly negative in the second quarter, reflecting the softness in the digital first-quarter-ending order book.

Livestock and poultry diagnostic sales of $23.9 million grew organically 20% in the first quarter. As noted up front, this very strong growth exceeded our expectations. We continued to benefit from higher sales volumes in Germany as a result of government tenders for bovine testing programs.

We do not expect the growth in the first quarter to be indicative of full-year growth, due to a couple of factors. First, we anticipate further declines in BSE revenues, driven by continued price erosion in a very competitive market, as well as an increase in the minimum testing age requirement in Europe that goes into effect July 1 of this year. Second, we expect sales volumes associated with the bovine testing programs in Germany to become less additive to revenue growth as the year progresses, because product sales associated with these programs began to ramp up in the second quarter of last year. We still anticipate full-year organic growth to be in the mid-single-digit range, with growth decreasing sequentially over the next 3 quarters.

Our water business had sales of $19 million for the quarter, or 5% organic growth, with contributions from new accounts and penetration of the wastewater testing market in North America, as well as gains in our core Colilert testing business in Europe. First-quarter growth was in line with our thinking, and consistent with our expectations for full-year organic growth.

Turning to the rest of the P&L, the gross margin at 53% was nearly 1 point above our thinking in January, reflecting some favorable product mix, as well as operational efficiencies in both our livestock and poultry, and reference lab businesses, where we experienced higher-than-expected volume in the quarter. Operating expenses at 35% of revenues were roughly in line with our thinking. As we indicated in January, operating expenses as a percentage of revenue are highest in the first quarter, due to spending in support of commercial activities such as trade shows and annual sales meetings. Our spending profile in 2011 is consistent with this pattern.

Our effective tax rate of 31.2% was largely in line with our expectations. Share count came in a bit higher than our projection in January, due to a few factors -- a higher share price that increased the dilutive effect of existing stock options, higher option exercises, and somewhat lower repurchase activity during the quarter.

Turning to the balance sheet and cash flow, we ended the quarter with $153 million of cash, and $127 million of debt, for a net cash position of $27 million. Our inventory balance of $127 million was in line with year-end levels and our expectations. DSO at 40 days remains in good shape. Our free cash flow was $23 million, or 62% of net income. As noted in the past, free cash flow tends to be lowest in the first quarter due to regularly-occurring events such as compensation payments and increases in receivables related to the ramp of some of our more seasonal businesses.

Looking forward, we project full-year revenues of $1.205 billion to $1.215 billion, an increase of $15 million from our previous guidance in January, largely due to forecasted benefits of currency. Our revenue guidance implies 9% to 10% reported revenue growth, which translates to organic growth of approximately 7% to 8%. Though organic growth is unchanged relative to our outlook in January, the components of this growth have changed slightly, with stronger growth expected from reference labs, and somewhat lower growth from sales of our digital radiography offering.

We continue to project full-year gross margin to be approximately 53%, about 50 basis points or so above the 2010 full-year rate. We reaffirm this projection despite the higher-than-anticipated margin in the first quarter, given that some of the quarter's strong performance was the result of favorable revenue mix for both livestock and poultry diagnostics, and instrument consumables, that we believe will lessen in ensuing quarters. We expect second-quarter gross margin to be 100 basis points or so higher than our full-year average, due to the seasonality of our rapid assay business. We continue to project operating expenses of approximately 34% of revenues for the full year, and all of this results in full-year operating margin of approximately 19%.

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. Net interest expense is expected to be approximately $2 million to $2.5 million, and weighted average share count should be down approximately 2% from the full-year 2010 level. This share count is slightly higher than our expectation in January due to the factors I just discussed. All this leads us to increase our full-year EPS projection to $2.66 to $2.71, compared to our January guidance of $2.62 to $2.68.

This change in guidance versus January incorporates a projected $0.02 favorable impact from currency, partially offset by a projected $0.01 negative impact from higher share count. The remaining $0.02 increase to the high end of the range reflects our first-quarter over-delivery related to business performance. At this point, we temper further upside to the high end attributable to business performance, with watch areas including the pace of economic recovery in our major markets and the situation in Japan. We do, however, feel confidence to narrow our guidance range by bringing up the low end by $0.04, reflecting an additional $0.01 from business performance compared to the high end of the range.

For a little bit more detail on currency rates, the rates implicit in our guidance today are the euro at $1.43, the pound at $1.63, and the Canadian at $1.04. To remind, every 1% weakening of the US dollar vis-a-vis our basket of currencies, increases 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 roughly in line with first-quarter ending levels. Capital expenditures are expected to be approximately $50 million, and we project free cash flow to be about 115% of net income.

Now I'd like to turn it over to Jon for some further comments.

Okay, thanks, Merilee. Just brief comments on the quarter, before we open up to Q&A. On the economy and the market, all of our data, which is pieced together from a variety of internal sources including the Cornerstone data that Merilee routinely references, indicates that we have not yet returned to a consistent trend of growth in pet business. In other words, we saw no improvement over the last quarter. So given that, I'd remark that Idexx's 8% organic revenue growth in Q1 is pretty strong performance. We remain cautious on the market outlook until we see patient visit growth consistently in the market.

Practices who are investing in our technologies are exhibiting growth, and indeed, that is the essence of our strategy, to provide the tools and technologies to help practitioners stay relevant and valued in the minds of the pet owner. Great examples of this investment include our ProCyte Dx launch, which is exceeding customer expectations and our sales goals. The placement quality is also very good. We are placing ProCyte in a variety of strategic accounts, such as specialty and referral hospitals, and veterinary universities. These accounts are regarded in the industry as key opinion leaders who have influence on the wider market.

We believe their positive experience bodes well for our long-term strategy of testing during the pet visit. This is a concept we refer to as real-time care. Importantly, we do not view the increase in real-time care testing as necessarily cannibalizing testing from the reference laboratory, although the two are clearly substitutes for each other. Real-time care tends to increase the amount of testing done, increasing the size of the pie, if you will, as it leads to testing where no testing had been previously thought possible.

Turning to our rapid assay business, we are pleased to have launched the new SNAP kit for Cat, to rule in or rule out pancreatitis. We have a press release out on that launch today. This kit, called SNAP FTL, F which stands for feline, is another example of Idexx's innovation in creating an entirely new category of testing, although I would note the cat market is a lot smaller than the canine market, they also have less tools for diagnostic support.

Finally, we are excited with the accelerating placement of Cornerstone, which were up over 20% in the quarter. Cornerstone customers now benefit from the latest version released in March. With this new release, Cornerstone 8.1, a practice can more easily realize the promise of electronic medical records and all the benefits that their use can bring. For example, Cornerstone 8.1 allows the practice to easily log, track, and display a wide array of vital signs and biometrics for each patient, ranging from temperature, pulse, and respiration to diet and body score, an indication of pet obesity, and yes, some people do believe that we have an epidemic in obesity in pets, so we are trying to help out there. In general, we see that when a practice adopts Cornerstone's electronic medical record capability, the practice is literally transformed, and you see it in increased staff productivity, growth in practice revenues and patient visits, and in the bottom line.

Idexx's margin expansion is on track, as evidenced by our Q1 results. In labs, for example, we are making satisfying progress with the adoption of lean processing, and are actively identifying standardized and best practices across our global lab network of now 50 labs. For example, utilization of our online test [scoring] technology is expanding rapidly. This technology not only drives efficiency and error-proofing at the clinic, but also drives operational efficiency at our labs by significantly reducing the work required for our sample processors to enter test sample information into the laboratory information management system.

Along these same lines, we continue to roll out our proprietary global laboratory information management system, a system that we call Links. This internally-developed system was designed for the unique requirements of processing pet samples, and is customized for our lab processes. All 4 of the UK labs, including the new one we opened this quarter, are now utilizing Links and realizing the benefits, and we expect to complete the transition to Links in most of our labs over the next 3 years.

Beyond the companion animal segment, I was also pleased with our 20% organic growth in the livestock and poultry diagnostics segment, or LPD. As you know, 88% of LPD's revenues are international, and our sales teams, including those in Europe, have done a fabulous job in serving customers looking to eradicate disease in their herds with the help of our diagnostic technologies. While Europe was strong for LPD, we also saw good growth on a smaller scale in China and Brazil, so a nice geographic diversity. Quarterly revenue growth in this business can be tough to predict, but the long-term trends and our pipeline of future products remains attractive, and with rising food costs, producers have every incentive to drive greater herd productivity through disease management.

So in summary, Q1 is not what I would call a robust economic recovery in our core markets, although we saw continued stabilization. However, we and our customers can and are taking control of our destiny by introducing and adopting the new diagnostic information technology offerings that allow the veterinarian practice to deliver a great pet owner experience during the visit, and convince pet owners to devote a greater share of wallet to veterinary care in a way that enhances the health, well-being, and longevity of their beloved companions. All of our research continues to point to the fact that the pet-owning population is willing to devote more of their discretionary income to their pets' healthcare, but if and only if they understand the value of the medical services provided by the veterinary practice. Our opportunity is to make it easy and intuitive for veterinarians to demonstrate that value, and to be an essential focus of our strategy.

With those comments, Cynthia, I would like to open the call to Q&A.

(Operator Instructions). Ryan Daniels, William Blair.

Let me start with a quick question on the end-market. I understand based on your data it sounds like visits actually took a bit of a drop in the first quarter, and I think during our channel checks, we've heard the momentum has been building throughout the year, into March, perhaps being a particularly good quarter relative to the prior month, versus the prior 12, and I'm curious, number one, if you would provide any color on the trends you intra-quarter, if you have it, and number two, do you guys believe that the inclement weather in the US in January, which I think was a lot worse in some markets year-over-year to the perhaps drove the visit, such that the underlying demand is actually a little bit stronger than your data shows?

Thank you for that question, Ryan. Indeed, that actually was what we saw over the course of the quarter. January was tough, it could have been weather related, and March was the best month. We do caution that monthly data can be a little noisy. We've seen that kind of pattern before, and it doesn't always sustain, so in fact, we saw that last year, where things were good through April, and then May and June weren't so good. We remain -- we are more confident in quarterly data that we are monthly data, but if you want to parse it by month, we can see a progression as you seem to have indicated with your channel checks.

Maybe a follow-up to that, is there anything that you guys look at in perhaps the reference lab or the point of care as a leading indicator, so for example, maybe the reference labs, you saw weakness in a big wellness profiles that established base lines and that's more discretionary, and maybe that starting to bounce back, or do have any color there that gives you comfort that the market is starting to improve, looking forward?

The thing we look at it is I would say, coincident indicators. We can look at, parse the data, not just our Cornerstone data, but other data to try to figure on what's going on with fundamental traffic. It's hard for us to figure out whether our profile is a wellness profile or it's a sick animal profile, because a lot of cases, they are the same profile. It's hard for us to figure out the type of testing that's being done. On the reference lab, or in-house. And so our trends are that, we didn't see a lot of improvement in these core volumetric in Q1 over Q4. It's just the way it is. I think we are a going to be pretty excited when we do see that improvement and we expect that will come some day, but we don't want to call before it's there.

Fair enough and then last question, I'll hop off, get back in the queue. Just on the CAG division, I know you're going to lose DJ soon as the customer-facing unit had, what are your current thoughts on that, looking at external to hire somebody, internally, someone else managing that division, or what are you going to do there and what are your thoughts on the potential impact from that going forward? Thank you.

We have a very strong and deep management team at Idexx. We have actually built a very strong management team through the ranks in the North American commercial-facing organization. There is a tremendous excitement and momentum in the business. We are looking at various ways to backfill and replace that particular role. But I really have no concern with regard to the short-term or long-term momentum of the business. I think it's more than any one good contributor in the business.

Miroslava Minkova, Leerink Swann.

Congratulations on another very good quarter. Let me start with the organic revenue guidance. You're leaving it unchanged today, and it's a little surprising, because you started on such a strong note. You had 8% organic growth this quarter, it certainly implies that growth might actually temper a little bit for the remainder of the year. Can you maybe walk us through some of the elements pertaining to this outlook?

Hi Miroslava, it's Merilee. We feel very good about the growth, the organic growth that we had for the quarter. I think it was solid, and a couple of instances, which I tried to call out. I do think that we felt that we may have had some impact from timing, first the livestock and poultry business, that very strong 20% organic growth. It's very hard to predict the exact timing of those government orders, and they're large so they can create some lumpiness between quarters, and so we kind of caution and have that in mind as we think about our full-year guidance.

And as well, I did mention some situations with instrument consumables, with some distributor programs, we think some timing in Europe, as well as some changes that we made in our rapid assay business to our seasonal marketing programs, may have just created some timing between quarters. All of that, and again, I think just being mindful of the economy and built into our projections is that the economy will gradually improve over the year. I think we still are feeling that baked into our guidance was about a 1% benefit from an improving economy over the course of the year, that we are just -- not wanting to take things up and not change the organic growth guidance at the moment.

Sounds like you're still a little bit cautious on what's happening to the economy. Given that you didn't see much of a change in the first quarter yet.

I think that's a fair characterization, Miroslava.

Okay, great, and my second question, the Links system, how soon can we possibly see it rolled out in the US or in some of your larger networks here? Your larger labs here?

Again, thank you for that question. We are very excited about that system, in that it both drives operational improvements, and gives us an opportunity to significantly improve the customer experience beyond what is already a good customer experience in the lab business. We are currently evaluating the exact sequence, obviously our US lab network is the biggest one in the 5 continents that we operate, and so we are attentive to getting our ROI on that investment, and the right sequence of implementation and as we have a clearer path, we will let you know. Thank you.

Dawn Brock, Kaufman Brothers.

I think, first, I just wanted to ask, on the ProCyte placements of 235, obviously that paces very well with your target of 1,000 for the year, but how did that pace based on your internal expectation?

I did exceed our internal expectations for the quarter very nicely. I also want to say that we had a -- our plan came together nicely, not only in the US, but also in Europe in the fourth quarter we seeded the Europe with some important early strategic accounts that gave us good word-of-mouth, and the European team did a very nice launch with ProCyte in Q1. It was good exceeding our expectations in both North America and Europe, and we feel like we've got a lot of runway with ProCyte looking into the future.

Okay, taking that back for just a second, Jon, and just tell me if I am barking up the wrong tree. Is it fair to say we have 2 large -- obviously a hematology analyzer, a chemistry analyzer, these are must-haves for pretty much every single clinic of any size. You've had 2 massive next generation launches over the last 3 years, almost on top of one another is it fair to say that there is kind of going to be an inflection point where the revenue-generating event of actually selling the instrument along with the increase in the utilization with the consumables actually just come together and you get both happening at one time?

They do go together, and they are nicely integrated with the Idexx VetLab station and integrated with Idexx, we're now routinely doing software downloads and programs and they are integrated more easily with their practice management software. There's a third smaller instrument that's part of the mix too, which is Snapshot, which does the thyroid testing and can read a variety of our rapid assay products, and that's actually doing -- the performance of that instrument in the field is very good, too.

It is a nice combination, we are very pleased with the seeding of the large specialty referral hospitals, really there is -- there's been nothing similar to what ProCyte provides in hematology, which has historically been a more challenging and more sensitive technology, and we have been very successful, not only with the accuracy and the comprehensive information that we can provide with LaserCyte, but then you add the speed on top of that with ProCyte, and it really is -- we believe it will become a must-have, along with Catalyst and everything else, the expectation, our hope is that we can continue momentum.

And the only offset I would say to that is that our experience over 20 years in the companion animal veterinary market is that things happen in slow motion. These trends are long, but they don't always happen overnight, as much as you think they should or could. I think it's more of a -- the long-term momentum that we would have in the business, as opposed to an individual inflection point. But we will see. That's certainly our strategy.

That's fantastic color, and I think that what I am more responding to is the fact that instruments and consumables did 11% organic growth off of an 11.6% organic growth. It just appears as though if that seasonality -- is that something where we should look at the first quarter and say okay, sp ProCyte has had now 2.5 quarters, 3 full quarters, I guess, but really 2 full of commercial, to ramp up now we are seeing the utilization of the consumables volume kind of hit for that machine?

It is early days. And it is nice to see the adoption, we know people are running their ProCytes more frequently than they were running their LaserCytes when they do a 1-for-1 upgrade, kind of makes sense, when the LaserCyte took over 10 minutes and ProCyte gives you the same accurate results in 2 minutes. It was a bottleneck, and so it's become a lot easier to run the entire profile in-house as the result ProCyte. And as, of course, we are intensely interested in seeing the impact on that in practices and as we gain more experience, we will be able to measure that with more certainty and provide more color.

Excellent. My last question is just on the lab side. Again, organic growth of 10% is clearly, as the metrics indicated, even to you guys internally, growing well ahead of the industry. Can you talk a little bit about contract changes, about maybe the demand profile for your clients, and customers. And their higher utilization patterns. That supports that kind of growth.

If you will, the underlying growth, the pet traffic growth isn't really driving this. It's really continued expansion of our lab network globally. And providing -- I just think our lab business is executing very well. Not only of course are we getting that 10% organic growth, but we're seeing it with productivity enhancement and margin expansion. And that's all coming from a variety of factors, including really getting to world-class quality levels.

I think between the commercial teams and lab organization, around the world, that we are just executing very well in the reference lab business. Is nice to see we've been investing in that business for quite some time, we continue even with this, we continue to invest in the business, as I noticed previously, we have got some things in the pipeline like Links that I think are going to be pretty profound over the next several years. It's not the only thing. It's a good business, but we are continuing to look for drivers of longer-term sustained growth and keeping up the momentum.

Fair enough. And Merilee, I know this is going to sound like an odd question because we don't have a reference number, but could you give us a idea of what the margin expansion, from a basis point perspective was in the labs for the quarter? Either sequentially or year-over-year, but 10% organic growth, revenue growth number, what kind of leverage you can get on that from a margin perspective?

Yes, we just don't break out that separately, Dawn, but I think you can assume that based on what we have been saying about a balance here of, we're getting returns on investments that we have made in the lab business, at the same time, we are continuing to drive some further investments. But we've had some nice margin expansion, but it's not at the level it could be at if we weren't continuing to invest back in the business. I guess I just want to reemphasize what I said earlier, that we have made some nice progress in margin expansion in that business, but we have our sights set on a margin number that would still allow a pretty significant expansion here over the next 2 or 3 years.

Dave Clair, Piper Jaffray.

Sorry to keep talking about the labs here, but I did have one more question, and I was hoping you could give us a sense of what same-store growth was in the labs, if we adjust for the new day labs that you guys have been opening? Does that make sense?

Just give me a little but more help where you're going with that, because there are ways to measure.

So in the quarter, sounds like you opened a day lab in New Orleans and in London, and if I remember right, we have opened a couple additionally in the prior quarters here. I'm just trying to get a sense of what same-store growth is, if you will, --

Same lab growth, the lab expansion is part of it, but we have -- we are growing in the existing labs too. It's not the only factor.

So would you say -- is a 5%, is it higher or lower?

David, I think as far as same-store, it would be fairly consistent with what we are seeing overall for our patient metric. It's pretty --

What we are saying is that it's not just -- we look at that growth, the growth is coming from expansion of client base off of existing courier networks, expansion of courier networks, expansion of labs, it's not just the labs. It's other things, will price realization in there, and the one factor is not is what we refer to as the core patient traffic. That is not a contributing factor to the growth.

Okay, thank you for the color. Just given what we saw on Catalyst Dx in the quarter, is there any change to your expectations for Catalyst Dx placements in the year, or are we looking for a nice rebound here?

We feel pretty good about the Catalyst numbers from an order point of view. It was meeting our expectation, the only factor that's just in the noise is Japan. We actually do intend to launch a Catalyst in Japan, that's one of the few markets we actually need to get regulatory approval, but that's a very, very small number in relation to our total Catalyst placement goals, so, but we are maintaining our outlook.

Okay, I'm sorry want to sneak one more in here. Just given what your commentary on digital radiography was, I am hoping you can maybe try to tease out here what growth or the decline in digital radiography was for the quarter? Just split that up from practice management as far as growth?

Yes, we really do look at the two of those together, but I would say that basically, we saw a bit of growth, actually probably mid-single digits growth in our computer systems business. And so --

Offset would be --

A slight decline.

Jonathan Bloch, SunTrust Robinson Humphrey.

Really nice quarter, considering the environment. I think the US trends seem right in line with our work, so I'm actually going to go in a different direction with my allotted questions, and maybe I can get two questions and a clarification if that's okay.

The first question was, international was up 13%, and looks like a nice re-acceleration from the third and fourth quarter. I know your comments on LPD, but even if you back out some of that upside, it still looks like international was up double digits off of a tough comp, and again, a nice re-acceleration, yet Jon, in some of your comments it seems like the end markets and international, you don't believe changed all that much. If you can speak to why you guys were able to put up a nice level of re-acceleration in international markets versus 4Q, despite maybe not a very good environment at the end market.

Thank you for that question. I will try to talk about the -- you noted that of course a piece of it is the livestock and poultry diagnostics, which is essentially international business, but if I just look at the companion animal side of international, our European team is executing very, very well, they did a very nice job, as you know, it was really the first quarter of launch of ProCyte, and so that was a contributing factor.

We had a -- is not small but it's nice, we had a very nice rebound in Latin America. Across all of our lines of businesses, it's not the biggest thing in the world, but it was very nice, and we did very well in China and Australia. Japan was kind of odd because in fact, we thought we saw some pull-forward in the consumable there, as people got a little concerned about supply disruptions resulting from the tsunami, so we are more sanguine and concerned about, like everyone, we really concerned about Japan is what's going to be the impact on consumer sentiment, we can supply the market, the portion of Japan that was affected by the tsunami, I think all people know is a very, very small percentage of the market. It's more what's the mentality on the consumer there, and that's really an unknown to what degree that will rebound, so we are cautious.

And maybe just to shift gears and the other allotted question if you would, on the chemistry side, I think this is the second quarter in a row where your chemistry placements were a bit below your expectations, I know some of that is due to the focus on hematology and on ProCyte. Maybe if we could look back see a couple years ago, pulmonary care seemed to be maybe even around 85% penetrated, and so where I'm going with this is, do you think that the pulmonary care is largely saturated here in the US, and now we have defaulted over to sort of a replacement market, if that's the case, what you think that replacement opportunity is, in other words, is it every 5 or 6 years of people swap out their chemistry analyzer, maybe you can speak to some of the moving parts there. Thanks.

I think it depends on -- if you look at chemistry versus hematology, I think that chemistry has been in large part a replacement market for quite some time. I don't think there's a real change, and I don't think we've reached the point where it becomes a replacement market. But they are replacing it with equipment that can do a lot more for them, in our case of course, can easily provide the result within the span of a 20-minute exam.

Hematology has not been as fully penetrated, or utilized. That still the case today. That hasn't changed. We think ProCyte is very, very different, and really gives a completely new face to point-of-care hematology, in the more sophisticated accounts that really didn't have an effective hematology solution before then. We have LaserCyte, and we use LaserCyte but it wasn't quite as quick as they would have wanted in terms of time to result.

And so what -- getting back to the placements, one thing I was very pleased at, and Merilee mentioned it, was the quality of the placements we refer to the penetration of a larger referral accounts, and also the 40% of our Catalyst patients in North America that went to competitive accounts, that's a material increase from prior quarters, and takes a little more sales focus to pull that off. Idexx customers generally know us and like us and understand the value of all of it. If they haven't been an Idexx customer for a while, that takes a little bit more work, but it's also a much higher quality placement. Combined with ProCyte, that was a nice accomplishment that the North American sales team did in Q1.

Okay, great, and my one clarification if that's okay, Merilee for you, you gave a ton of detail, and it's always very helpful, but I think I lost you somewhere in there. So on the consumable side, was up 12%, but normalized for distributors I think you said up 10%, but yet it looks like you guys did work off some inventory, because inventory went from 4 weeks last quarter down to 3.8 weeks, and then consumables, you mentioned, I think, some stocking, actually not at the distributor level but at the practice level, and maybe, if you net everything, was organic growth or constant currency closer to 7% than 8%, and maybe if you can walk me through as best you can.

There is a lot there, I know it's complicated. Our game here is to try to give everybody an understanding of what we believe is going on with fundamental growth, and so for us, with the multiple dynamics going on, that can make it a little bit of a mouthful. Yes, to reiterate the numbers first and then I will talk about distributor inventory in a second, but organic growth of 12%, normalizing for distributor inventory, that takes it down to 10%, and then with some of the clinic stocking that we had and also a bit of timing we believe in Europe from Q4 into Q1, we believe that we got down another couple of points or so, to say, 8% organic growth.

Now to the point on distributor inventory levels, when we report those numbers, the 4 weeks, the 3.8 weeks, remember, that includes both rapid assay products and instrument consumables, so different things can be going on with inventory levels for both of those products, and when we are reporting about growth, importantly, we are talking about the change in the distributor inventory levels year-to-year. So it isn't the absolute level necessarily, it's relevant to how did the level change versus last year. It makes it a little bit complicated, but hopefully, that helps to clarify a bit about what we are --

They are opposite versions, the consumables is an adjustment in one direction with consumer inventories, and the rapid assay adjustment in the other direction, we were pleased with the, what we think, as Merilee mentioned, the underlying fundamental demand in rapid assays was probably 1% or 2% positive. It was nice to see that. It was mostly volume. And then the adjustments on the consumable side, to try to parse that in the high single digits.

Ross Taylor, CL King.

Hi. Two questions, I think are pretty simple. First, some of your comments about the rapid assay product line, were maybe a little bit more positive than I would've expected, it sounds like there is some improving trends, maybe in the canine rapid assay, is there any factor you can point to that might be helping canine rapid assay as the competitive environment moderated, or is there something of that work? And then my second question is regarding the protocols aspect of SmartService. Have you learned anything about your changing physician behavior or are vets ordering more tests, if they are using protocols as programmed. Any color there would be helpful.

Thank you. On the first, it's a very competitive market, if it remains as competitive as it was last year, I think if anything, I think people have a greater appreciation, maybe the fact that they have a little bit greater appreciation for the value of parasitic disease screening with 4Dx, and people gone back to that, maybe, that we've been more effective in communicating that value. But it's a very -- I think it's more our performance, not any change in the nature of the competitive environment, and we see that in AUPs. It's more of we doing well on volume, and the pricing reflects the competitive nature of the environment.

Second question is very good on protocols. I think we are still early, I would hope to have some more color on that by mid-year. It's a good question and we will come back to you then. Thank you.

Mitra Ramgopal, Sidoti.

I know in the guidance you said you expected about 1% of growth to come from the economy. I was wondering if there is a way you can correlate the gradual decline we are seeing in unemployment levels in terms of when you would like to see increased foot traffic.

I think there is a correlation, in those, and we are starting to see a gradual increase in employment, and that's built into our 1%. I do think it is fair to look at employment levels, as a broad economic parameter it's important to our business. Thank you.

Okay and a quick question on the lab business. You've certainly opened a few this past quarter. If you can share with us the plans going forward in terms of continued expansion, if any new labs are already baked into the guidance.

Yes. We have continued expansion, and the new labs that we have in the planning stages are baked into the guidance, but it's not just the lab issue. We have just good growth across the business, and executing very well. But we do have plans for additional day lab expansion around the world.

Finally if I may, just a quick question on ProCyte. Is it more geared towards replacement or would you say it's new placements?

That's a very good question, and the answer is both. It upgrades of existing hematology. Whether it's ours or 25% in the first quarter was competitive, I think it's also situations where people maybe in some practices, they weren't using much in-house hematology, they didn't, for whatever reason, they didn't trust it, or it just didn't quite work for them, they were doing the chemistry and not the hematology. Maybe they had a system but it wasn't really being used very much. Now you put a ProCyte in there and it's a totally different story.

That wouldn't be a case where brand-new, but certainly a completely new attitude with regard to hematology testing in-house. This, I think as we indicated previously, our expectation is that ProCyte will become a must-have piece of equipment for a larger practice who prides themselves on the quality of the care that they can provide to the pet owner's. There is really nothing that compares to it, in terms of its speed and accuracy, ease of use, and of course integration capabilities.

With that, Mr. Ayers, I would like to turn it back over to you for any closing comments.

Thank you all for your questions, an hour has passed since we opened. We appreciate the interest. We remain dedicated to our mission to enhance the health and well-being of pets, people and livestock. I encourage everybody to come or attend electronically, our annual meeting, which is 2 weeks from yesterday. The first Wednesday in May. With that, I will close the call. Thank you.

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