愛德士 (IDXX) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to the IDEXX Laboratories second-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 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 March 31, 2011 and 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, 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, idexx.com.

Finally, we plan to end today's call by 10.00 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 thank you for joining us today. First, a quick overview of our second-quarter results. In our press release this morning, we reported revenues of $317.9 million, a year-to-year growth of 13%; and diluted earnings per share of $0.83, a growth of 34%. Revenues were somewhat favorable to our thinking at the time of our April call, and earnings per share were about $0.05 above our thinking at that time. Revenue performance relative to our expectations was the result of a few factors.

First, US distributor inventory levels for instrument consumables and rapid assays ended the quarter slightly above our customary range of 3 to 4 weeks. Additionally, revenues from livestock and poultry diagnostic kits were higher than expected, offsetting somewhat lower revenues from instrument placements. The higher distributor inventory levels contributed $0.02 of earnings favorability. The remaining $0.03 of favorability came from operating performance, as manifested in the gross margin, primarily due to favorable revenue mix, as well as lower spending on operating expenses.

The economic environment continues to provide no benefit to our largest market, the companion animal veterinary market. Second-quarter data from a subset of customers who use our Cornerstone Practice Management System show that, in aggregate, patient visits were down just over 0.5% year to year, and practice revenue growth was about 2% -- both very consistent with what we observed in the first quarter. What we see causes us to maintain our view that, while the market is stabilizing in North America, a return to more robust growth will be very gradual and somewhat uneven, given the sensitivity of consumer sentiment to vacillating economic news.

The situation in Europe varies by country, but we believe, overall, it is consistent with the US. As for the Asian markets, the fundamentals are generally stronger, and we have not seen a significant impact to our businesses resulting from the natural disasters in Japan back in March. Second-quarter revenues grew organically 8%, after adjusting for a 5% favorable impact from currency. This organic growth is on par with the first quarter, and up 2 points from the 6% we achieved in Q4 and for the full year last year. Our instruments and consumables, with second-quarter revenues of $98.6 million, posted organic growth of 9%. When further adjusted for changes in distributor inventory levels for consumables, the growth rate was 8%.

As for the individual components, revenues from sales of our IDEXX VetLab instruments, at $21.1 million, grew 5% organically. Total placements for our primary consumable generating instruments, chemistry and hematology, increased 17% year to year. Our ProCyte and LaserCyte hematology placements increased by nearly 70%, driven by ProCyte, with 284 installations in the quarter.

Even with the success of ProCyte, the interest in LaserCyte remains strong; and placements were only down about 10% year to year, despite the fact that ProCyte was not on the market in the second quarter of last year. This interest affords us the opportunity to sell both new LaserCytes and those we take in trade from a ProCyte sale and refurbish. Combined chemistry placements of VetTest and Catalyst were down slightly year to year, and were again a bit light versus our expectation. As has been the case for the last couple of quarters, we believe that chemistry placements in the US and Europe were somewhat impacted by sales force attention on a successful ProCyte rollout.

An important metric for us is the percentage of placements into accounts new to IDEXX. We have seen increasing success in this area, and over 40% of the second-quarter Catalyst placements were to such accounts. The corresponding statistic for ProCyte was over 30%. As in prior quarters, we see that over 90% of the ProCytes were either sold to a Catalyst -- were either sold with a Catalyst or to a customer who already owned a Catalyst. And this is a testament to how complementary the two instruments are in supporting the practice of realtime care.

First-half chemistry replacements, Catalyst and VetTest combined, totaled 1,658; and ProCyte placements year-to-date are 519. We continue to project full-year chemistry placements of about 4,000, and we believe ProCyte placements will surpass our previous projection of 1,000 by 10% or so. Instrument consumable revenues of $66.2 million grew organically 10%, or 9% when further normalized for changes in distributor inventory levels. With this quarter's strong performance, in combination with Q1 normalized organic growth of 8%, we now project instrument consumable normalized growth of 7% to 9% for the full year, roughly double the growth rate we saw in 2010.

Our second-quarter rapid assay sales of $44.2 million grew organically 7% year to year. When normalized for changes in distributor inventory levels and seasonable marketing programs, as discussed last quarter, revenues grew 2% for the quarter, which is consistent with the growth we experienced in Q1. The step-up from the modestly negative growth rates we experienced in 2010 are primarily driven by increased canine parasitic disease testing volumes, heartworm in 3Dx and 4Dx, which is the result of improved commercial execution, as well as the launch of our SNAP feline pancreatitis test in April. We continue to see weakness in feline testing, reflective of year-over-year declines in patient visits, due to the economy, as well as due to changes in vaccination protocols, which lengthened the recommended time between vaccinations.

We expect rapid assay organic growth for the full year to be about 2%. As noted up front, US distributor inventory levels for instrument consumables and rapid assays averaged just over 4 weeks at the end of the second quarter, based on forward-looking demand. This is at the high end of our customary range, and is likely due to stocking in advance of the July 4 holiday. Our reference laboratory and consulting services business, with revenues of $99.1 million, had organic growth of 10% in the second quarter, consistent with Q1. Growth was strong across all regions, and the majority of growth came from higher test volume, driven primarily from the addition of new customers.

Our expanding footprint of laboratories, growing menu of innovative specialty tests, and our broad and integrative diagnostic and information management offerings are all important contributors to gaining new accounts, both in the US and internationally. Higher price realization contributed about one-third of our second-quarter growth. Going forward, we expect organic growth for the full year to be consistent with what we saw in the first half. As just noted, we continue to expand our lab footprint to improve turnaround time and service levels. We opened a new day lab in Minneapolis during the quarter, bringing the global lab network to 51 labs across 5 continents. We plan to open additional day labs in the second half of this year.

We also continue to implement operational improvements in our labs, in the form of equipment automation, lien processing, and new technologies. All of these efforts, combined with volume leverage and higher realized prices, are driving meaningful margin expansion, as evidenced by the fact that our reference lab's operating margin grew by about 200 basis points in the second quarter of this year, from the second quarter of 2010. We expect to see continued margin expansion over the coming years, from all of the factors I've just mentioned.

Our practice information management and digital radiography systems, with revenues of $17.9 million, declined organically 8% in the second quarter. We had anticipated flat to slightly negative growth, given the low book of orders for digital radiography we had going into the second quarter. Order flow for digital systems remained lower than expected in the first couple of months of the quarter; however, we did see a nice pickup in June, which gives us a good start to Q3. Interest in our Cornerstone Practice Management System continues to grow, reflecting our efforts to provide a system that has both broad medical and business functionality, and is easy to use.

As is the case with digital radiography, we entered the third quarter with a healthy backlog, and we expect overall growth in the second half of 10% to 15%, which would yield low- to mid-single digit organic growth for the full year. Our Livestock and Poultry Diagnostic revenues grew organically 21%, to $25.4 million, in the second quarter. As noted up front, this continued strong growth exceeded our expectations and reaffirms that this business's revenues are less predictable to forecast, given the large influence on sales from disease outbreaks and government-sponsored testing programs. We experienced better-than-anticipated volume growth in BSE, and continue to benefit from higher sales volumes from the eradication program in Germany that we discussed in prior calls.

With respect to that program, it appears that [Catalyst] supporters have expedited testing beyond what has been mandated by the government, in order to obtain disease-free status at an earlier date. Additionally, we saw higher testing volumes in some emerging markets, such as Latin America and Eastern Europe. Our Livestock and Poultry Diagnostic team sees potential in these markets for bovine and swine testing; and accordingly, they have increased their focus in these regions. Given the first-half performance, we now expect organic growth for the full year to be approximately 10%.

We continue to expect that growth will moderate over the balance of the year, as we see further price erosion for BSE tests, combined with lower testing volumes, given the new EU rules that went into effect July 1, increasing the minimum testing age requirement for BSE from 48 months to 72 months. As well, we expect sales volumes associated with the bovine testing programs in Germany to be less additive to growth going forward, given the acceleration of testing that we have seen to date this year, and given that the programs ramped significantly in the fourth quarter of 2010.

Our Water business had sales of $21.5 million for the quarter, or 6% 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. Second-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 55%, was nearly half a point above our thinking in April, reflecting favorable product mix, as well as some operational efficiencies in our Livestock and Poultry business, due to the higher-than-expected volume in the quarter.

Operating expenses, at 32% of revenue, were modestly below our thinking, though we expect a step-up in the second half, both as a percentage of revenues and in absolute dollars. With regard to the profile of operating expenses to revenues, we see that the second quarter is traditionally a high-revenue quarter for us, due to some seasonality in our rapid assay and reference lab businesses, which consequently yields a lower percentage of operating expenses to revenues. Our effective tax rate of 31.4% was largely in line with our expectations, as was share count.

Turning to the balance sheet and cash flow, we ended the quarter with $159 million of cash and $133 million of debt, for a net cash position of $27 million. Our balance sheet -- our inventory balance of $134 million was $7 million higher than at the end of the first quarter, and slightly higher than our thinking in April, as a result of timing of chemistry slide consumable shipments and modestly higher inventory levels in our Livestock and Poultry business. DSO at 41 days remains in good shape; and our free cash flow was $50 million, or 103% of net income.

Looking forward, we project full-year revenues of $1.205 billion to $1.215 billion, unchanged from our previous guidance in April, as we anticipate US distributor inventory levels will return to the customary range of between 3 to 4 weeks in the second half. 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 April, the components of this growth have changed slightly, with stronger growth expected from our Livestock and Poultry business and somewhat lower revenue from 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 second quarter, given that some of the quarter's strong performance was the result of favorable revenue mix from Livestock and Poultry Diagnostics and VetLab instrument consumables, the result of the higher distributor inventory levels that we believe will lessen in ensuing quarters. We project operating expenses of approximately 34% of revenues for the full year.

As noted, this would imply a step-up in the second half, reflecting opportunities we see to accelerate targeted investments in our reference lab business and on a couple of R&D projects, to capitalize on some good momentum we have in these areas. 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. All of this leads us to increase our full-year EPS projection to $2.68 to $2.73, compared to our April guidance of $2.66 to $2.71. This change in guidance versus April reflects our second-quarter over-delivery of $0.03 related to business performance, and our intention to modestly accelerate investments in areas just noted.

This guidance also assumes that US distributor inventory levels return to a customary range in the second half, and thus the $0.02 of over-delivery in Q2 from higher inventories will not carry through for the year. For a little more detail on currency, the rates implicit in our guidance today are the euro at $1.40, the pound at $1.60, and the Canadian at $1.02. Currency sensitivity remains the same. A 1% weakening of the US dollar, vis-a-vis our basket of currencies, increases revenues by approximately $4 million and operating profit by about $750,000 on an annual basis. And now, I would like to turn it over to Jon for some further comments on the business.

Okay. Thanks, Merilee. Clearly, we're not getting any more help from the economy in Q2 than we were in Q1 -- or Q4, for that matter. Even so, I am impressed with the quarter's contribution to our financial goals for the calendar year 2011. Our organic revenue growth of 8% for Q2 in the first half shows that our strategies are delivering, despite a bit slower economy than we expected coming into the year. And as to our EPS outlook for the year, the fundamentals behind our Q2 EPS performance give us strong confidence in our updated outlook for the year of 15% to 17% diluted EPS growth, when normalized for the discrete benefits we achieved in 2010 related to some milestone payments derived from the sale of our pharma business in 2008.

Key business highlights include the reference labs, where the 10% growth from this global line of business is not only important in its own right, but helps by further leveraging the operating margin that we are achieving in this business as a result of our productivity initiatives. Also, I am pleased with the overall performance of the IDEXX VetLab instrument and consumables business. Our placement of chemistry systems in Q2 was a strong performance, although the number of Catalyst Dx placements was a bit lower than our expectations. Hematology placements, ProCyte and LaserCyte, were outstanding.

Instrument consumable growth of 9% in Q2, normalized as per Merilee's comments, follows 8% normalized growth in the first quarter, both in a flat market for pet visits. This growth speaks to several elements of our realtime care strategy. First, placements of instruments in larger strategic accounts that are high-volume users of diagnostics. In this case, ProCyte Dx is a great door opener with these strategic accounts. Second, the 40% Catalyst placements to new accounts that Merilee mentioned. Third, the volume uplift we see when an existing chemistry customer upgrades Catalyst Dx in North America, and to an even greater extent in some international markets.

Fourth, the impact of the larger profile per run -- a behavior change incentivized by our rebate programs, such as realtime care protocols, better tracked through our web-based smart service connections to the in-house lab. And fifth and finally, a modest volume pickup in chemistry slide utilization when an existing Catalyst customer adds a fast ProCyte hematology analyzer to their in-house lab. Speed is the essence of realtime care. Our instrument realtime care strategies are all geared over the long term towards this consumable growth momentum; and this volume growth, in turn, becomes one of the important long-term drivers of operating margin expansion in the instrument line of business. As investors know, consumables are the high-margin element of the business model.

Looking to the second half of the year, we fully expect to pick up in Catalyst unit placements, due to a variety of commercial initiatives in North America, and the launch of Catalyst in Japan, starting in Q3. And we weren't selling Catalyst obviously prior to that, so it's a benefit to the year over year. Japan is a very significant market for in-house testing, and we have significant long-term opportunity with Catalyst to capture new accounts, given our historically lower install base of chemistry systems compared to other developed markets of the world.

To finish up the Companion Animal Group comments, I would like to take the opportunity to formally welcome to IDEXX George Fennell, our newest corporate officer. George has taken over responsibility for the commercial organization for our Companion Animal Group in North America. His track record and sales and marketing leadership -- and his deep familiarity with our US customer base, that comes from his 8 years with Pfizer Animal Health -- will help turbocharge our already successful strategy to grow the pet health care market and our revenues in North America.

Turning to the Livestock and Poultry Diagnostics, I'd certainly like to congratulate this team for driving another outstanding quarter of 20% organic growth. Their success in several product lines and several regions, including the emerging markets of Brazil and China, is truly impressive. While we don't talk about the specifics of our new product pipeline in R&D until products are announced or near launch, I do want to observe that we have as exciting set of products in development over the next 5 years as I have seen in my decade at IDEXX. Our R&D productivity has really picked up over the last couple of years; and I believe that our markets continue to be worthy of investment in innovation and commercial resources.

The pet-human bond is strong, people still need to eat protein, and at some point we will see a meaningful turn in the economy. So, along these lines, as Merilee has mentioned, we are choosing to increase investment in the second half of the year in such areas as reference labs, with further geographic expansion around the world, sales resources, and incremental R&D investments. Some of these R&D areas leverage trends in technology, including the use of cloud base and mobile computing to advance our capability to differentiate our diagnostic offering and give the vet even better tools to grow their business with pet owners.

We also have an exciting pipeline of new diagnostic assays that will continue to advance the standard of care in veterinary medicine and pet wellness. More to come in the ensuing year on these various initiatives -- but suffice it to say, we see opportunities to drive continued near-term and long-term growth, even in a tough economic environment. So, with those comments, Roxanne, I would like to open up the call to questions.

(Operator Instructions) Nicholas Jansen, Raymond James & Associates.

Hi, great quarter. Just a quick question on the Catalyst. What are you guys doing to kind of generate better growth on the commercial side in North America? And kind of your expectations for back half of the year, as you've kind of been disappointed with your performance over the last couple of quarters? Thanks.

Thanks, Nick. Welcome to IDEXX. I wouldn't say that we were disappointed with our performance, but you do clearly observe we see -- we will see a pickup in unit placements in North America, and also significant growth in Asia in the second half of the year. We are continuing to, I think, see our sales force learn how to sell realtime care, both a combination of Catalyst and ProCyte. I think we have been through the learning phase on ProCyte. It was a brand new instrument launch, a significant instrument launch, and we're now able to really fine tune the ability to sell both. And we're continuing to learn how to sell protocol-based rebate programs that provide an attractive incentive for customers to both increase their profile as they buy our new instruments, and be able to afford the new instruments.

And then, just on the economic picture, if you think about where we are today, where you thought we would be when you initially gave guidance back in October, kind of talk to me about that expectation on volumes. And is there any pockets of areas of improvement, or is it pretty much broad-based, as we would expect?

Yes, I'd say we're probably 1% lower pet visit growth than we would have -- than we had in our plan, which has of course been made up for with growth that we've manufactured through our strategies of innovation. And I think it's kind of hard to say. It really does follow the normal consumer trends around North America -- and indeed, around the world. You know, obviously, Asia really unaffected by it, other than Japan, with the temporary issues regarding the tsunami. Europe is a little bit -- a diverse market. Every country is a little bit different. But it's a market that's showing the same kind of growth for our businesses as we're seeing in North America. And of course, the exception there would be our Livestock and Poultry Diagnostics business, which is predominantly -- close to 90% of those revenues are outside the US. And obviously, they're doing very well in Europe.

All right, thanks a lot. Great quarter, guys.

Thank you.

Ryan Daniels, William Blair & Company.

Jon, I wanted to follow up on one of your comments in the prepared remarks, regarding the placement of ProCyte with Catalyst Dx, and the fact that's actually driving more chemistry sales. Can you give us a little bit more granularity to kind of what type of increase you're seeing at those clients which have the dual equipment base?

Yes. Obviously, ProCyte has a couple of positive impacts. The first one is, it is the door opener, in an attractive way. I think there is something about hematology, in particular. ProCyte really provides a level of capability for in-house hematology that even LaserCyte did not provide, because of its speed and unprecedented accuracy. LaserCyte had excellent accuracy, but it didn't have the speed. And so, as a result, the Catalyst, in many times, just goes along with it. And I think we have become quite effective in placing Catalyst and ProCyte in accounts that are new to IDEXX. So, that's a good door opener.

Second, of course, Catalyst and ProCyte are a very natural pair for realtime care. And it just makes it easier to include a CBC with a chemistry run, which is, of course, good medicine -- best medicine. And then, third, we have seen -- we have been selling Catalyst for a couple of years now, and ProCyte really only the last year. So, a number of our ProCyte sales have gone to Catalyst customers, existing Catalyst customers. And I think what we're seeing is maybe the hematology was the bottleneck to running more in-house; and with ProCyte, we've eliminated that bottleneck. So, we're seeing a modest pickup, actually, kind of modest single-digit pickup in the chemistry slide utilization when we put our ProCyte in.

I want to say that these are very early numbers. We don't even have year-over-year numbers yet, because we haven't been selling ProCyte for a full year. So, this is very early data, but the numbers are encouraging. All of these trends -- you know, you can put a number here, you can put a number there. But I think they all speak to, we really like the long-term dynamics of how all of these come together to drive consumable growth.

Okay, very helpful color. And then, maybe one quick follow-up on Japan, as we think about the launch of Catalyst in the back half of this year. I guess really two questions associated with that. Number one, do you know the current install base of chemistry analyzers, with some range? I know you might not have an exact number, but kind of how large that market is. And then, number two, is the thought process there to quickly try to get approval for ProCyte, to bundle the two together, to add more of a valuable proposition in that market?

Yes, I would say -- when you say install base, I assume you mean the market as a whole?

Yes, overall market.

Yes, I think there are around 8,000 veterinary practices in Japan. It's kind of -- I don't know, it's a techie market. They like instruments. They're really probably one of the most in-house oriented, naturally in-house oriented markets in the world, meaning versus reference labs. We have a meaningful but much smaller share of that install base than we have in other markets. And Catalyst is -- really provides capability, with its features of a fast and easy and the clip, that's not available in the Japan market.

And you're right -- ProCyte, which actually is manufactured in Japan, would be, as it is in other markets, would be a very nice addition. Of course, we have LaserCyte today, and that works very well in Japan, and we are going through the approval process with ProCyte in Japan. But Japan is the only market in the world that has an approval process for instruments. So, we just have to proceed through that before we can be adding a ProCyte to the equation. When we do, it will be just a fabulous in-house offering, and unmatched both on chemistry and hematology. And it 's an in-house market, so we're excited about it.

Great. And I apologize, but one quick follow-up. Any idea on how long that approval might take, or is that too hard to determine?

Yes, it's going to -- it's not within the next 12 months. And I would say it's not outside 24 months. So, we're -- it's a little hard to predict. They don't have particular time frames. And we will just have to see. But we're going through that process.

Okay, thanks. And great quarter, guys.

Miroslava Minkova, Leerink Swann.

Hi, Jon. Hi, Merilee. Congratulations on the quarter. Let me start by talking about the vet market environment. Obviously, the economy hit sort of a soft patch here in the second quarter. Maybe if you could elaborate a little bit on what you're seeing happening at vet practices, and what your assumption is for the remainder of the year. Are we going to stay at the current level? Or do you still anticipate things to sort of improve a little bit towards year end?

Okay, I will take the first half of that question, and the expectations I will pass to Merilee. What we saw was not really a soft patch, we just didn't see a growth, any change in the rate of growth versus the first quarter. So, maybe it was a soft patch with regard to expectations; but with regard to really the trends, they were flatlined, if you will. What we do see is individual practices are performing very well in this environment, as they are really adapting to the changes in the pet owners, and adopting some of our technologies, which drive productivity and a better customer experience. And practices are just managed better, do better. So, we actually see a great variation in practice success, even in the current economy. But as a whole, really, it wasn't a soft patch as much as it was a growth dynamic. Merilee?

Yes, and Miroslava, in regards to our thinking about the economy as we look forward in the year, I think that based on the fact that we just haven't really seen any movement so far in the first half of the year, that we've kind of tempered down our thinking about any kind of help from the economy over the course of the year. So, I think if things do pick up at all, it will be good news for us and some upside.

Okay. Thanks. That makes sense. And secondly, maybe if you could -- since you did end up at the high end of your organic revenue guidance range for two quarters in a row now, maybe if you could help us understand how much of the second quarter was the distributor inventory changes? And why should your organic growth rate moderate in the second half of the year, perhaps other than these distributor adjustments?

While Merilee is looking up the distributor number, one thing is, we just had -- if you look for the Company as a whole, we had great organic growth in the Livestock and Poultry Diagnostics business in the first half of the year. And we had some, actually, good growth in the second of last year. So, we are going to lap ourselves there. The organic growth will -- while it's a tough business to predict, we would see a significant drop in its growth in the second half of the year. So, that's one contributing factor.

Yes. Miroslava, I would just say as I look at it, first half versus second half, when we look at organic growth for the Company overall, adjusted for the distributor inventory dynamics, and assuming that the distributor inventories will come down in the second half, then the organic growth rate would be exactly the same for first and second half. And as I had indicated, I think that what we will see is that the components of organic growth, what makes up that total, will be a little bit different between the first and second half, and that we will see a lesser contribution from Livestock and Poultry Diagnostics, and offset by a somewhat higher contribution from instruments. But overall, very, very consistent organic growth between first and second half.

And just -- I know you know this, Miroslava, but just to remind investors in general, Livestock and Poultry is about 8% of our business, and instruments is -- I don't have the exact percentage, but it's probably not that different. So, really, these are refinements around the mean.

Thank you very much. I will get back in queue.

David Clair, Piper Jaffray.

Congratulations on a great quarter.

Hi, David.

You guys touched on this a little bit in the call, but I was hoping you can give us some more color on the initiatives underway to drive operating margin expansion in the reference lab. For example, the [Lynx] lab information system and test consolidation, I think the metric was 200 basis points expansion, year over year. Where do you guys think this can go?

Well, we see sort of a steady progression in the operating margin growth in the reference lab, over really the next five years. And as we just continue to implement the productivity initiatives, and of course, get the benefit of volume leverage. You mentioned Lynx, which is really -- hasn't -- it's a very small percentage of our Company today, but it will be in the vast majority of the worldwide -- it will be operating in the vast majority of the reference lab business in the next three years or so. So, that's really a factor that's going to be one that goes forward. And Lynx not only has significant productivity benefits, but also gives us a great deal more information to be able to serve the customer in the way that we provide diagnostic results.

It kind of eliminates a lot of constraints that we had with historical [lens] systems. So, it's just -- it's also an introduction of new technologies in labs, some of which is just technologies that we can adopt and some of which that comes with volume leverage, in the larger labs. It's continuing to take advantage of a hub-and-spoke core and day lab network, to optimize where those tests are run, from a both customer service level and a cost standpoint. And so, we think there's significant steady progress -- opportunity.

Okay, great. And just a quick follow-up. Given the day labs that IDEXX has been adding for the last year, I was hoping you could give us an estimate of same-store sales growth within the reference lab. Just trying to tease out the impact of the additional day labs.

Exactly how do you mean same-store --

I mean labs that were around a year ago, what was the growth rate, kind of year-over-year, with the labs that you already had in place?

Yes, it's hard to really look at it that way, because sometimes we're putting a day lab into an existing market that we're already serving, and we're just increasing the service level and maybe increasing the number of customers. But it's already -- they serve existing customers, too. So, it's not like a Starbucks or something, we put one in and we have a new store with sales, and we can measure that versus the same-store sales growth. It's not a way that we look at the business.

We more look at the business in terms of, really, new customers versus existing customers, and growth in their testing volume, maybe sort of the core volume, and what they're adding in terms of specialized tests. We find that those are more helpful metrics. And what we're seeing is, at least in the US market, where I think we have better data, is very consistent with what we see in our Cornerstone data. If you kind of strip out all of the factors -- price, growth, and number of customers, and growth in utilization of specialized testing, the core volume isn't really -- there's no growth in it. And that's very consistent with the Cornerstone data.

Okay, great. Congratulations again.

Thanks, David.

Ross Taylor, CL King.

Hi, you may have answered this to some extent in your prepared remarks, and I just missed it. But I wonder if you could outline some of the specific factors that are prompting you to increase your investments in more lab facilities or more day labs. And I just wondered, is it some of the success you've had with some of the labs you've opened over the last year or so? Are there other factors involved?

It's a good question, and I can expand upon that. I think we have really good momentum in the business around the world, in North America and internationally. And the incremental investments will be both in North America and internationally. There are markets that we're not in, but are attractive markets where we're already there, in some of our other businesses, including some of our other companion animal businesses. And look, the market is saying, hey, we'd like a lab service from IDEXX, too. So, I think we've just kind of -- coming down the learning curve on how to open these labs, and that gives us confidence. It's an investable business model, and we think that's an attractive investment that will create shareholder value for us.

Okay. And just one quick follow-up, you also mentioned you have a good pipeline of new diagnostic tests. And I just wondered if you could highlight whether that's more weighted towards the reference labs or in-house tests?

Again, that's a good question. In fact, what we're really looking at, first and foremost, is disease states, and then the core R&D work is actually -- we're finding the bio marker is work that has to happen, whether you're going to go with an in-house system or a -- on the reference lab. And even in-house, it could be on an instrument, and it could be a standalone kit, test kit, like a SNAP. And the answer is, all of the above. So, that's a core area of R&D for us. We think there are areas that can benefit from additional diagnostic bio markers. And it's going to improve all of our offerings by doing so, and expand the market, and expand the opportunity to find, monitor, and treat diseases. So, we think, again, those are good investments to make.

Okay, thanks very much. Thank you.

Jonathan Block, Sun Trust.

Maybe just a first question, Jon or Merilee. The deleverage that you're talking to in the back half of the year, I think it implies around 7% to 8% revenue growth, but only about 5% EPS growth. And Merilee, you threw out some verbiage about additional labs. Is there anything else in there from an initiative standpoint? And then, maybe more importantly, how long does that last for? Is that done by the end of '11, or does it spill into '12? Thanks.

Yes, it's actually a couple of areas. We talked about the labs, it's some sales resources, other commercial resources, on the margin. And it is some R&D initiatives that we are accelerating, because we think they're good investments. And it's all on the margin. Merilee?

No, I think that's right. I mean, also, part of the growth here too is our information technology investment. And some of that is, as we've talked about, with our laboratory information management systems and whatnot. So, some of these things, Jon, we had expected would tick up in the second half of the year anyway; and I think in addition to that, over and above where we see some really good momentum in some of these areas, we just felt it was appropriate to kind of turn up the gas in spending, and really capitalize on that momentum.

And Jon, I know you know this, but of course another diagnostic in the first half and the second half is the -- ending the second quarter with a little bit higher distributor inventories than we would typically see at a quarter end. And of course, that helps the first half earnings growth and hurts a little bit the second half earnings growth. So, another factor.

Great, perfect. I appreciate that. And then, maybe second, the focus on the rapid assays. And Jon, even if you tease out some of that additional inventory that you just referenced, it was up for the second quarter in a row, and that was after down for four straight quarters in 2010. So, certainly a positive, and maybe -- any color there? In other words, is it the world of easy comps? Are you seeing any of the guys that left you for the cheaper heartworm, only by competitor, have come back? Is it just a little bump from the new feline that you rolled out? Any commentary would be great.

Thank you. And yes, that is a very astute observation. It's a correct observation when you do the adjustments. We are seeing about a 2% growth in the first half of this year, when we saw negative growth last year. And it is all of what you mentioned. Of course, we introduced in the second quarter a new SNAP -- SNAP for feline pancreatitis, called SNAP fPL. And I think one of the things that -- new SNAP -- one, which was really asked for by our customers, once they understood what we could do for pancreatitis in a dog, and what we could do in the lab -- they said, look, we would like to have something for the cat in-house. And whenever you have a new SNAP, I think it's reason to go in and talk to customers about it, and sell the whole SNAP line. People like to have new products come in.

But we have also done a really good job, I think, in the core canine parasitic disease market, and just continuing to be price competitive. We're seeing some price erosion in the core heartworm test, but we're doing very well with the volume. So, it's kind of a -- it's all of the above. The one thing that's not helping us is -- I think maybe one thing that is helping us is, on the canine side, we're just seeing a little bit better year-over-year growth in pet visits versus 2010, but we're not seeing that on the feline side. We see a divergence between growth of canine and feline vet visits. We saw that divergence, that divergence is continuing, so that the feline pet visit side is not helping the equation.

Great. And then, if I could just throw in a quick clarification question. Obviously, LPD is doing very well. You mentioned the headwinds coming in on BSE, as the months go up. Can you give us some rough guidelines as to what BSE is, as a total percentage of your LPD revenue?

It's about 10%.

Perfect. Thanks, guys.

Erin Wilson, Bank of America Merrill Lynch.

Can you speak a little more to the traction of your realtime care program -- what proportion of your customers are currently on board with your initiatives there, and how are you seeing this ramping over time?

Erin, thank you for the question, and welcome to IDEXX. I would say that there has been a percentage of customers that have always -- a small percentage of customers that have always practiced realtime care. And what I am defining as realtime care, very specifically, is that they're actually running the blood work during the exam, and presenting the results to the pet owner before the exam is complete -- and therefore, getting the real value of that face-to-face interaction. While, of course, there is a large market for in-house testing, if you're talking about chemistry and hematology, a lot of times it was run quickly, but it wasn't run quickly enough to be able to be presented to a pet owner with a 28- to 30-minute appointment length.

But what's happening now, with our new systems, Catalyst and ProCyte, we are uniquely in the position to be able to turn -- to have the practice turn that around and see the benefits in the pet owner experience, and the compliance that results from having the answers right there and the follow-on medical services that might be appropriate, given those results. So, that is a -- it's still, I'd say, a minority, a smaller percentage than what we'd see. We'd see it as a long-term growth driver for diagnostics. And I would say also, that when we see a customer adopt a realtime care approach, we see a growth in diagnostic testing in general. It really doesn't hurt the reference lab, because some of that follow-on work is reference lab testing that might happen.

And so, I would say we're very early days, but it's exciting to see. And one of the things that's different, I think now, than maybe in the past, is that more progressive veterinarians get that they need to be pet-owner focused. And when they are pet-owner focused with their medical services, meaning showing the results on the exam, their practices grow. And so, they're more attuned to the need to, if you will, market their practices and adjust their strategies in order to deal with the current economic environment. So, they're very open to considering moving to realtime care. We're still pretty early days, but we're very excited by what we see.

Okay, great. And then, given recent transactions in the sector, do you perceive your online technology opportunity as better or worse?

I think we have a -- if you look at the kind of the core areas of our R&D or technology competence, I would say to the previous question, diagnostic assays, instrument systems, and information technology, in general. And so, one of the areas that Merilee talked about, I was very pleased, is the real momentum that we have with Cornerstone, that which of course is a software offering that not only runs the practice from a business point of view, but kind of -- again, very similar and somewhat synergistic with realtime care.

The adoption of electronic medical records is another significant trend that is being -- that vets are realizing more and more not only gives them significant productivity benefits, but also improves the pet owner experience. So, that's just one of a set of opportunities we see to grow the business, by investing in information technology and related products and services that either supplement our existing offerings or provide new offerings. And I don't think that's really changed. I think it just gets more attractive every day, with the general trends that are happening within technology.

Okay, great. Thank you.

Mitra Ramgopal, Sidoti.

A couple of questions on the reference lab business. First, looking at your competitors and the market overall, are you more inclined to expand your lab footprint in North America, or look more towards Europe and Asia?

Yes, thank you. We really see opportunities in all of our markets, whether they're North American or international. Although, of course, Canada is an international market from the US perspective. And Europe, Asia, it's -- we think it's a leveragable business model. We are a global player, already. And so, it's really just -- it's continuing to invest and grow in that global footprint.

And just a quick follow-up on the price increases. Are you the price leader now, or just pretty much, again, as you look at the fact that there are fewer visits and the soft economy, your ability to continue to raise prices, is that going to be an issue?

Well, I think, first of all, you have the list price, and then you have the discounts to customers off that list. And so, I would say it's a -- we're realizing a little bit of price in the reference lab business, as Merilee mentioned. But it is a very, very competitive market; and I think every day, it gets a little bit more competitive. So, I would say, it's kind of hard to answer that question. I would say we have to compete to grow our business. We have to be price competitive. We think we have a superior lab offering, but we still have to be very price competitive. When somebody doesn't use our lab, it's hard to convince them. We have a superior lab offering, we have to get them to start using us; and in order to do so, we have to be price competitive.

Okay. Thanks again.

Thank you. And that concludes our questions for today. And I'll turn it back to Mr. Ayers for closing comments.

Okay, I want to thank everybody for being on the call, and we look forward to updating everybody as the year progresses. And as I said, I think we're excited about our opportunity. We're not expecting much from the economy. And we'd like you all to help out here with the economy and get things going for us. And that's going to be beneficial to everybody. But anyway, I do also want to congratulate the IDEXX team that is on the call. It was a great quarter. And I think we're very excited, not only about the rest of the year, but the multi-year outlook that we have in front of us. That concludes our call.

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