愛德士 (IDXX) 2011 Q4 法說會逐字稿

Good morning, everyone, and welcome to the IDEXX Laboratories fourth-quarter 2011 earnings conference call. As 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 quarterly report on Form 10-Q for the quarter ended September 30, 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. 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. For the fourth quarter, our revenues of $307.2 million, yielding 7% organic growth, were largely in line with our expectations at the time of our third-quarter call. And earnings per share of $0.67 were about $0.04 above our thinking. As we had expected, revenue growth in our Livestock and Poultry Diagnostic business abated from previous quarters, and was the driver for the 1% lower organic growth than the 8% that we experienced in the first three quarters of the year. The earnings favorability was primarily driven by a $3 million milestone payment related to the sale in late 2008 of our feline diabetes therapeutic. This contributed just over $0.03 to EPS. Slightly lower share count with a minor secondary factor in EPS favorability.

Let me speak for a moment on the economic backdrop for our Companion Animal business. Recent data showing a modest improving trend in certain aspects of the U S economy are reflected as well in our fourth-quarter metrics, from a subset of nearly 500 veterinary clinics using our cornerstone practice management system. Patient visits were up about 1% in the fourth quarter, and this is versus flat in the third quarter and down 0.5% in the first half of the year. And practice revenues grew by 3.5%, which was up 50 basis points from the third quarter and up about 150 basis points from the first half.

Despite the turmoil in the European economy, our Companion Animal business in Europe achieved 8% organic growth in the fourth quarter. While we remain cautious along with others about the predictive liability of short-term data, and the negative impacts to global economies from potential further shocks occurring in any one geography such as Europe, we nonetheless feel that the metrics we are observing support the assumption in our 2012 outlook that our businesses will benefit modestly from a very gradual improvement in the macroeconomic environment.

Now for some further detail on revenue performance for some of our businesses. VetLab instruments and consumables, with fourth-quarter revenue of $102.4 million, grew 6% organically. Sales of instruments were $28.7 million, an organic growth of 2%. Worldwide placements of Catalyst were up 13% year to year, marked by solid performance in the US; and on the international front, strong placements in Asia-Pacific, due in part to the launch in Japan, offset relatively flat placements in Europe. For the year, our combined chemistry placements of that test and Catalyst were within a couple of percentage points of our goal of 4,000.

ProCyte and LaserCyte hematology placements increased by 12% over prior year. ProCyte continues to be a significant contributor to our growth. With 381 units installed in the fourth quarter, we ended the year with 1,179 placements, nearly 20% above our 2011 goal of 1,000 units. Despite the strength of ProCyte, LaserCyte remains an appealing choice for many, and the fourth-quarter placements were consistent with last year. Approximately two-thirds of these LaserCyte units had been traded in on ProCyte sales and certified for resale, which is an economically attractive option for both us and for our customers. Approximately 30% of our Catalyst and ProCyte sales were to new and competitive accounts.

Once again, we have seen significant growth in the number of SmartService users, with over 1,300 installations in the fourth quarter. This brings our active install base to over 12,000 customers. The continued activation of SmartService has helped drive our success with testing protocol rebate programs in North America and will support the use of similar programs in other regions. In addition, SmartService allows us to improve the customer experience with our analyzers by proactively managing instrument field service and downloading software enhancements over the internet.

Our instrument consumable revenue of $62.5 million grew organically 9% and changes in distributor inventory levels had an immaterial impact on year-to-year organic growth. Our fourth-quarter growth is in line with what we saw throughout 2011. As we've noted, the use of protocol-based rebate programs has enhanced our success in placing instruments, the primary contributor to consumable growth. These programs resonate with customers because they are aligned with the veterinarian's desire to practice best medicine, while providing a way that is intuitive to them to fund their capital purchase by using rebates to cover monthly lease payments.

Under these programs, the most significant portion of the rebate is attributed to the consumable sale. This is a change from other programs, where discounts are attributed to instrument sales. I mention this, as expansion of these rebate programs will have a slight negative impact on year-to-year consumable revenue growth rates. Accordingly, for 2012, we expect normalized organic growth for instrument consumables to be about on par with 2011, as growth in volume is muted by price in large part due to the change in the structure of our marketing programs.

In the fourth quarter, our rapid assay sales of $35.4 million grew organically by 14%. When normalized for changes in distributor inventory levels, revenues grew by 8%. This compares to the 2% normalized growth for the first three quarters of the year. A little more than half of the step up in growth in the fourth quarter was driven by a US price increase that went into effect on October 1, the first price increase on our canine parasitic panels, 3Dx and 4Dx, since 2008. Additionally, we picked up 1 point of growth from the continued successful ramp of our SNAP feline pancreatitis test, which was launched in the second quarter. In the US, canine parasitic disease testing volumes and feline testing volumes all showed a slight uptick from the first nine months. We believe this is in part reflective of the improved patient visit metrics and this relates to canine testing's successful execution of marketing programs. Our expectation for 2012 is to see normalized growth rates in the range of 4% for the rapid assay business, which is about on par with the normalized organic growth for the full year 2011. We anticipate that growth will be stronger in the first half and then moderate as we anniversary price increases and product launches.

US distributor inventories for instrument consumables and rapid assays averaged a little under four weeks at the end of the fourth quarter, based on forward-looking demand, which is within their normal and customary range. Our Reference Laboratory and Consulting Services business, with revenues of $91.7 million, achieved reported growth of 13% in the fourth quarter, which translated to 10% organic growth for both the quarter and the year. Growth was strong across all regions, with the majority of the growth coming from higher test volume driven primarily by the addition of new customers. A slight improvement in same-store volume and increasing adoption of panels that incorporate our innovative specialty tests also contributed to the increased volume. Acquisitions contributed just over 2.5% of the 13% growth in the quarter.

Notably, in the fourth quarter, we acquired RADIL Research And Diagnostic Testing Laboratory in early November and ALX Laboratories in Manhattan in early December. RADIL serves the bioresearch market, with health monitoring and diagnosing testing services. The combination of RADIL with our small existing presence in this market will enable us to provide a comprehensive diagnostic solution to bioresearch customers, addressing both reference laboratory and in-house testing needs. The acquisition of ALX will allow us to accelerate our expansion in the sizable Manhattan veterinary market, with an established presence and an existing customer base. ALX is co-located with the Animal Medical Center, one of the largest animal hospitals in the world, with a national reputation as a leader in animal healthcare. While we are in the early days, the integration is going well in both of these acquisitions and both have performed in line with expectations during the quarter.

In addition to these acquired labs, we opened two new day labs in the quarter in support of our goal of acquiring new customers and strengthening service levels. One in Nashville, Tennessee, and the other near Milan, Italy. This brings our total global network to 56 labs, up from 48 at the end of 2010. Throughout 2011, we also continued to invest in the area of electronic connectivity between our customers and our laboratories. With additional enhancements to our web-based test ordering and results delivery system, VetConnect, nearly 60% of our customers in the US are now submitting electronically generated test requisitions.

VetConnect works seamlessly with clinic practice information management systems to improve workflow and ease-of-use of the clinic, and to drive meaningful operational and productivity improvements at our labs. Information technology investments such as this, along with lab technology developments, Lean and Six Sigma processing, global purchasing contracts, and volume leverage will continue to drive margin expansion in our Reference Labs over the next several years. As we look forward to 2012, we expect organic growth for labs and consulting services will continue at about 10%, driven primarily by an increase in volume coming from footprint expansions, increased penetration of our specialty tests, and modest benefits from an improving economy.

Our practice information management and digital radiography systems, with revenues of $21.8 million, grew organically 5% in the fourth quarter and 2% for the full year, performance consistent with our expectations as we entered the quarter. Strong order volume, attributed in part to the seasonal pattern for fourth-quarter capital equipment investments, resulted in a solid backlog entering 2012. We expect the innovative enhancements for both product lines, along with increasing industry appreciation for integrated solutions, will support organic growth in the high-single- to low-double-digit range for 2012. Our Livestock and Poultry Diagnostic revenues declined 3% organically to $24.1 million in the fourth quarter to yield 11% organic growth for the year, largely in line with our expectations.

As anticipated, we experienced a decline in BSE revenues in the fourth quarter, resulting from the new EU rule that was effective July 1 of 2011 that increased the mandatory testing age requirement for BSE from 48 months to 72 months. We also saw a moderate decline in revenues associated with the bovine testing programs in Germany, driven by a difficult comparison as these programs ramped significantly in the fourth quarter of 2010. We anticipate that growth in 2012 will be in the mid- to low-single-digit range due to a couple of factors. First, we believe that the bovine testing programs in Germany have completed their ramp. Second, we expect further price and volume declines for BSE tests. Growth in 2012 will reflect continued expansion in developing markets in Asia and Latin America.

Our Water business had sales of $20 million for the quarter, which translated to 4% organic growth. This growth was in line with our expectations and resulted in 5% organic growth for the full year. We expect growth in Water for 2012 to be in the mid-single-digit range, reflecting growth in North America driven by volume gains from account acquisition and penetration of the wastewater testing market, as well as growth in our core Colilert testing business in Europe.

Turning to the rest of the P&L, gross margin at 52% was largely consistent with our expectations. Operating expenses, at 34% of revenues, were slightly below our thinking in October, reflecting the $3 million milestone payment that I described earlier, which is netted against operating expenses in the G&A line. Operating expenses, when normalized for this item at 35% of revenues, were in line with our expectations in October. Our effective tax rate of 30.5% was in line with our expectations. And, in the fourth quarter, as in the third quarter, we were able to release reserves in conjunction with the expiration of certain statutes of limitations. Share count was slightly below our expectations in October, reflecting somewhat higher repurchase activity in the fourth quarter.

Turning to the balance sheet and cash flow, we ended the quarter with $184 million of cash and $246 million of debt, for a net debt position of $62 million. As expected, our inventory balance of $133 million was approximately $4 million lower than the level at the end of the third quarter, due largely to the timing of chemistry consumable receipts. DSO at 41 days remains in good shape, and our free cash flow was $47 million, or 123% of net income. As we look forward to 2012, we project revenue to be between $1.3 billion and $1.31 billion, the decrease of $5 million to the high end of our range relative to the guidance provided at the time of our October earnings call is the result of the negative impact of currency, partially offset by the impact of the fourth-quarter lab acquisitions. The increase of $5 million at the low end of our range reflects these factors as well as a tightening of our guidance range by $10 million.

Our revenue guidance implies reported growth of 7% to 8%, which translates to organic growth of 8% to 9%. A 1% favorable impact due to acquisitions and a negative impact of currency of approximately 2%. Organic growth of 8% to 9% compares to the 8% we received -- we achieved in 2011. We expect that the momentum that we have in our Companion Animal Group businesses will more than offset lower organic growth for Livestock and Poultry Diagnostics for 2012. Implicit in our revenue guidance is a modest contribution of perhaps 0.5% to 1% from a gradual improvement in the economy.

We expect full-year gross margin to be approximately 54%, about 100 basis points above the 2011 full-year rate. The continuation of targeted initiatives in our two largest businesses, IDEXX VetLab and Reference Laboratories, will help lead margin expansion and will manifest primarily in the gross margin line. We expect gross margin in the first quarter to be somewhat higher than the full-year average, due primarily to product mix and manufacturing volume favorability. Operating expenses should average out to be between 34% and 35% for the full year. This spending level is consistent with the fourth quarter of 2011, when you exclude the favorable $3 million impact of the farmer-related payment. The moderate increase over the full year 2011 reflects planned investments in product, service, and information technology innovation, as well as commercial initiatives globally that support our revenue growth in 2012 and beyond. We expect the operating margin to be between 19% and 20%. This reflects about 50 basis points of operating margin expansion when you adjust 2011 to remove the favorable impact of the farmer payments received both in the third and fourth quarters, which totaled about $4 million for the year.

We expect the tax rate to be between 31.5% and 32% for the full year. Our projected tax rate is approximately 50 to 100 basis points higher than 2011, primarily due to the fact that we have not incorporated the benefit of the federal R&D tax credit into our 2012 rate. Net interest expense should be approximately $3 million, and weighted average share count should be down 3% to 4% from the full-year 2011 levels. The annual reduction in share count is higher than the 2% to 3% we have been averaging in prior years, due largely to the impact on 2012 of the step up in repurchase activity in the second half of 2011. All of this leads us to 2012 EPS guidance of $3.04 to $3.10.

We are maintaining the high end of our guidance range, as we anticipate $0.03 of negative impact due to currency relative to rates assumed at the time of our October earnings call will be offset by the favorable impacts of a slightly lower tax rate and lower share count, as just mentioned. The increase of $0.04 at the low end of our range reflects these factors as well as the increase in the low end of our revenue range. For a little more detail on currency, the rates implicit in our guidance are the euro at $1.25, the pound at $1.53, and the Canadian dollar at $0.97. For 2012, every 1% strengthening of the US dollar vis-a-vis our basket of currencies reduces revenues by approximately $4.5 million, and operating profit by about $800,000 on an annual basis. The projected impact of currency changes has increased slightly from our previous estimate, reflecting the growth of our international business. We project free cash flow to be approximately 110% of net income. And now, I'll turn it over to Jon for some further comments on the business.

Okay. Thank you, Merilee. We are pleased with how our 2011 wrapped up as a Company and the momentum we have going into 2012. As Merilee mentioned, our outlook for 2012 incorporates a very modest pickup in economic activity in our CAG businesses consistent with what we saw in the fourth quarter. And we remain cautious about an outlook that would be any more than a 0.5% to 1% improvement in practice visit trends over the 2011 levels. Having said that, our momentum comes from continued unique innovations that we bring to the market, including our realtime care offerings with in-house diagnostics, differentiated Reference Lab services and new and expanded information technology products and services.

A key theme in early 2012 was the introduction of new menu on our existing diagnostic platforms. In the rapid assay business we expect to launch an expanded canine vector-borne disease screening SNAP we call 4Dx Plus. Launch timing is subject to USDA approval, which we would expect in the early Q2. SNAP 4Dx Plus is able to detect two additional tick-borne diseases, added to the four vector-borne diseases, including heartworm, that we already cover with SNAP 4Dx. In total, 4Dx Plus will detect diseases that can be carried by a total of four different tick species. Dogs from most of the country are exposed to some, if not all, of these species and the bacterial diseases that they can transmit. SNAP 4Dx Plus will replace 4Dx at the same price giving our customers more value for their money and greater ability to detect patients with multiple simultaneous infections, an important clinical finding. We believe that the standard of care continues to shift slowly from heartworm-only testing to full annual vector-borne disease screening.

Moving on to the IDEXX VetLab suite, we will also be launching in April a valuable new test on our highly successful Catalyst Dx chemistry analyzer. This is a test that measures for levels of phenobarbital, a standard therapy used to control seizure in dogs. Virtually every practice has patients on phenobarbital, and our test is critical to determining if the dosage is within, and not above or below, the therapeutic range for the patient. While the test itself will not be a significant revenue generator to IDEXX in the context of the volume of chemistry consumables sold in the market, it will create another differentiator for the customer to use Catalyst and indeed the entire integrated IDEXX VetLab suite as their in-house solution.

In our Reference Labs our new menu additions will include the lab version of 4Dx Plus, which is popular with customers who prefer to use Reference Lab for their vector-borne disease screening protocol. In addition in the Reference Labs we have added five new real PCR tests to our canine and feline diarrhea panels continuing to bring new innovation in the area of molecular diagnostics for Companion Animal medicine.

Turning to our Companion Animal business in Europe, we are impressed with the 8% organic growth in this region achieved in Q4, a period marked by a light of macroeconomic uncertainty. Our team in Europe brings tremendous experience to the different country markets. In addition, these markets appear to be even earlier in their development than the US and thus have momentum to help offset the macroeconomic issues. We continue to make investments in Europe to expand our commercial sales organization and Reference Lab footprint; and, for example, we added the lab in Italy in Q4.

Moving to Asia, we are very pleased to have received approval to market ProCyte in Japan. The combination of Catalyst, ProCyte, and the IDEXX VetLab station will be a sort of game changer in Japan over the longer term, and this is a market that generally prefers in-house equipment solution to lab services for core chemistry and hematology testing. We expect a full launch of ProCyte in Japan to occur in Q2.

Finally, I wanted to give you an update on a process of the FTC investigation as we understand it. As we've said all along, we can't predict when and how the investigation will be concluded. For example, last summer we thought the FTC staff was nearing conclusion of its investigation, but staff required additional information. So, it's just very difficult to predict. But, our sense at this time is that most of the FTC staff fact-finding is done and that the FTC is working through its internal processes to determine whether or not to file a complaint against IDEXX in the administrative law court within the FTC or to close the investigation without taking any action. Ultimately, the decision whether to file a complaint or not is made by the commissioners of the FTC and not the staff. We do not know exactly when the commissioners will make this decision, but we suspect it might be sometime in the next several months.

As a reminder, if the commissioners decided to proceed with the complaint, we would litigate in the administrative law court, and my understanding is this litigation typically takes about nine months. Were we to have an adverse ruling, we would have the opportunity to appeal the decision to the commission, and were that appeal to fail, we would have the opportunity to appeal the commission decision in -- to the federal appeals court of our choosing. All of these proceedings could take a couple of years in total. And during that period, it would be business as usual for us. We remain confident about our legal positions for many reasons, including our prior success in two federal courts in which the legality of our distributor agreements was litigated. So, while we are hopeful that the investigation will be closed without action, we are fully prepared to defend ourselves in the FTC and beyond if necessary, and we feel that our legal position is very strong.

So, in summary, we have an economic environment with very modest growth, a competitive environment in the diagnostic space that is ever intensifying. This is a natural progression in markets that have attractive demand characteristics and opportunities for technological innovation. Of course, we bring and our competition expands the adoption of new innovations when they come to the market with imitation. And our goal is continue to be the leader in bringing innovations to the market, in part by bringing new levels of differentiation in value that build upon our existing offerings and thus driving organic growth revenue for the market and for the Company as a whole. And examples that we have talked about just in this call, of course, are vector-borne disease screening expansion of 4Dx Plus, realtime care with both 4Dx and phenobarbital tests, and the expanded molecular diagnostics offerings that we're offering in the lab. So, Cynthia, with that, I'd like to open it up to Q&A.

(Operator Instructions) Ryan Daniels, William Blair.

Let me ask you a quick one on the in-house protocol agreement program. Sounds like you're continuing to see that as a very successful strategy to place equipment, and I'm curious if you have data yet on what that does post placement for the consumable utilization? So, any way to compare that to an existing customer utilization or maybe that utilization versus the realtime protocol rebates?

Ryan, I'd say we're probably a little early on that, but of course, we do have data on what happens when a VetTest customer goes to a Catalyst customer or when a Catalyst customer adds ProCyte and those generally of course increase the utilization. And we got a little bit more runway on those to really have an analytical approach to that.

The other thing that were seeing that is interesting is ProCyte is when combined with Catalyst, is going into larger accounts. In fact, the average chemistry utilization of a combined ProCyte Catalyst placement is close to 50% or 45% higher than the average of our Catalyst install base that doesn't have ProCyte DX.

So, there are a lot of dynamics going on here. But I think we're pleased with the quality of the placements and all the different initiatives which are driving utilization and ultimately, of course, growth in the consumable volumes and revenues.

Okay. Very helpful color. And I guess a quick second question and I'll hop off. Just a little more color if you could on the R&D spend. I think it was up about 16% year-over-year, which is the biggest uptick we've seen in a number of years.

So, a couple questions there, just can you talk a little bit about that outlook as a percent of sales going forward? Do you expect that to stay at current levels? And then maybe you could discuss some of the priorities, be it platform, consumables, IT, et cetera, that you're currently focused on as we look forward on the R&D front?

Ryan, I'll answer the first question. I think the R&D levels as a percentage of revenue we expect in 2012 will be pretty consistent with what they were in 2011.

And Ryan, you got it. We're going to be expanding the diagnostic menu, the capability consistent with realtime care and differentiated lab services, which we really think are just different variations of providing, of serving the diagnostic market in general.

And of course, if you think about diagnostics, what are they? They're really information and medical decision support. So the information technology strategies that we have to both enhance the value of diagnostics and in fact, help veterinarians, improve the patient traffic and the revenue patient visit, by helping them communicate the value of their services is really consistent with our overall strategy.

So as we have advancements to talk about, as we've done in this quarter, each quarter we'll let you know. But we're obviously expanded the R&D because we think there's the opportunity in the market.

Okay. Thanks again, guys.

David Clair, Piper Jaffray.

Just a couple kind of OUS questions for me. I guess the first one, given the launch of ProCyte and Catalyst DX in Japan, how big of a market is that currently for you guys on the Companion Animal side? And how penetrated do you think you are in the market?

Of course we've launched -- we did launch Catalyst, the controlled launch in Q3 and, of course, grew that in Q4. We won't be launching ProCyte, although we're selling a lot of LaserCytes, but we won't be launching ProCyte until Q2. But it will be a great combination.

There's really nothing like a ProCyte in the Japanese market and what's kind of ironic here is that ProCyte, of course, is manufactured in Japan. So, it's got the kind of technology that the Japanese really appreciate. It's obviously a lot smaller market than the US, primarily because of the smaller economy and less pet ownership, but that doesn't make it a very substantial market.

There are 8,000 veterinary practices there although many of them are smaller, but I think what's interesting for us is that in Japan we have a relatively small share in relation to other countries that we're in. We have a very experienced Management team there. Actually, we've been in Japan for two decades. And we've sold instruments, but we really think it's going to be a whole new game when we add ProCyte.

The Catalyst is itself a new game, but then we add the hematology to it, and again, they really do most of their hematology tests, the chemistry testing and hematology in-house, although most of it is not done with our equipment. So, we do see a long-term expansion opportunity. It's just one more attractive market in our portfolio of International markets.

Okay. And then the 8% growth in Europe, that's pretty impressive given the challenges that we're seeing over there. Has this been fairly consistent during 2011? And what are you expecting in Europe in 2012?

We'll we had if I have recall correctly, off the top of my head we had 10% organic growth in Q3, and of course that was a period that had some economic turmoil, and then 8% in Q4. And I was just over with our entire European sales team, and they're really very excited about the opportunity going into 2012 in the context, of course, of economic uncertainty. I don't know if we're going to, with regard to outlook for 2012, I think it's really with the component of our overall organic growth guidance.

I would just say, David, that as we are looking at things, and we're seeing the combination of both momentum we have in the market and the different levels of market penetration that we have in different geographies, that we're just expecting pretty strong growth across all the regions for 2012. I don't think there's any one area that's driving growth significantly more than another area.

Okay, thank you.

Miroslava Minkova, Leerink Swann.

Let me start with just the comments on the competitive environment. It seems like the instrument revenue growth at least in dollar terms was a little bit lower than you have been in prior quarters. I guess I was wondering if there's anything that struck you there that was below your expectations, and also, if you could please tie this into Jon's commentary about the environment getting tougher competitively.

Abaxis is out actually promoting their strategy that having the Reference Labs helps them drive instrument placements. I guess I was wondering if you could respond to that. How do you respond to this competitively? Is it making any impact to you?

Miroslava, I'll just speak for a moment on the instrument revenue growth. I think we characterize the placements and how we felt about those, and I think again, I'll just to reiterate that. As far as placements were, they were, I think I would characterize this as solid in the US, and then in Europe they were a little bit lower than in the US and other geographies. And Asia was a little bit stronger, albeit a smaller market.

I think some of the factor that is driving a lower organic revenue growth is the fact that it is a competitive market and we are finding that our programs, our marketing programs do involve discounts. I talked about discounts on instrument consumables, but they also are requiring discounts on instruments.

And I think the placements -- I guess I would summarize in saying we're feeling good about the placements. We're pleased with the double-digit growth that we had both for chemistry and hematology for our largest instruments, and the somewhat lower AUPs that we have via discounts are something that is helping us to achieve the placement levels that we have.

And Miroslava, it's an entire business model, right? So, you've got the instrument placements and of course the instrument revenues, you have the consumable. We are pleased to see that the quality of our consumable growth is entirely volume related. We think that's a good cost strong strategic dimension to our Business.

And then when you put our cost reductions in there and you put the whole thing together, we're able to get the top-line growth and the margin expansion in the instrument business and continue to innovate. So of course, people are going to come when they can and follow and try to copy our innovations. That's the nature of these markets. And yet we are continuing to lead the way with new levels of differentiation.

I think one of the things that we're very pleased about, for example with our Catalyst and/or ProCyte install base is, the loyalty and the retention of our customers when they start using this, these technologies is extraordinarily high. They really value them when we put them in place. I mean, it's impressive. And so that's another thing that makes us feel good about the long-term prospects for growth in this Business.

Okay, great. And maybe just as a quick follow-up. The operating expenses as a percentage of sales guidance that Merilee you gave for next year, it's probably a little bit higher than what I would have thought. I appreciate you're making some significant investments there. Maybe you could give us some color on what exactly are you investing in? Well, I think I probably -- I'm not going to get into a lot of specifics on that, but we are -- the two primary areas will be within R&D. And then, within sales and marketing, it is largely related to commercial activities. There is some infrastructure investments that we are looking to make Internationally. We are also continuing to make investments in our commercial sales force in the US. So, I think it's really across the globe, a variety of different things.

Okay, great. Thank you. And I'll get back in queue.

Jonathan Block, SunTrust Robinson Humphrey.

Some of my questions have been already asked. I guess if I could follow up on Europe as well. Jon, you mentioned the slide step down from 10% to 8% in CAG, but again the number considering the environment was pretty good. Can you just maybe give us some more detail on the type of customer over there in Europe?

And what I mean by that is, is wellness testing as prevalent in Europe or is if not, and if it's not does that give you a little bit more of a cushion to those growth rates, because maybe the testing environment would be there for less discretionary than what we might see here in the US?

Jon, that is an excellent insight, and we do believe that so-called wellness testing or what we would prefer to call it is preventative testing, is really at a very, very low utilization versus the US. The majority, and it's really the way that schools have been taught. Of course we're trying to shift the market, but there is a much higher mix of if you will, sick animal or chronic-care type of testing, that's run, or testing to confirm a diagnosis.

And so, that's one of the reasons why I said I believe these markets are earlier in their development and also less discretionary, as a result. Also, the other thing that we're finding in Europe, and this is -- I mentioned this generally, but certainly it's been very true in Europe, is that with a combination of Catalyst and now ProCyte, we are actually getting into some large accounts that we really previously didn't have a great reason to get their attention.

Catalyst was very nice. Many of these accounts have wet chemistry, which is a technology that works very well in high volume, but it didn't capture their attention. But with ProCyte, when there's nothing like it in the hematology, we're capturing attention and we're getting the whole suite. And I think that's helping to. That's one of the market opportunities that we're capturing.

And of course the other thing is we're expanding the lab business in Europe. We have not traditionally been in all the countries. Now we're in Italy. We weren't in Italy before, even though we have very strong commercial organization in Italy that's done very well.

And so, when we add lab to that commercial organization, they get very excited. We did that previously in France and Spain, we have very, very strong operation. In Germany, the lab which actually serves a whole bunch of countries outside, surrounding Germany, and those services are expanding. So, a combination of the instrument business and the lab business have -- appear to have excellent momentum in Europe.

Okay, great. Thanks for that color. Maybe just one more question that might have a couple parts to it, but the organic growth and rapid assays was a big number. It seems like, Merilee, almost half the growth rate wasn't selling to the distributors. So, I just wanted to make sure I heard it correct.

Maybe $2 million was a sell-through into the distributors on the rapid assay front, but there was a normalized level of inventory on the consumables. So, I guess that's just sort of a clarification. And the second part of the question would be Jon, why aren't you taking price on 4Dx Plus, if you would? But if not today, that's something that you might roll out in a couple of quarters. Thanks, guys.

First, let me just clarify or walk through the components of the organic growth. Again organic growth, 14%. 6% of that was attributed to changes in distributor inventory levels year-to-year. And then, so the adjusted growth, the normalized growth, which is what we typically are looking at was 8%.

Right, so 8% I think is the right number. To answer your question, of course we did take a price increase in 4Dx in October as Merilee had mentioned. But we really think the opportunity to grow the utilization of vector-borne disease screening is a bigger opportunity than to realize price.

So interestingly, there are 70 million plus dogs in the US and not all of them go to the veterinary clinic, unfortunately. 35 million of them are on some kind of heartworm preventative, and only 21 million of them roughly, these are all rough numbers, are tested annually for heartworm, even though it's recommended to test them before you put them on a preventative.

And less than 9 million of those have heartworm test associated with a full vector-borne disease screen, even though 75% to 80% of the dogs in the country are exposed to ticks. So, we think that there is an opportunity to continue to expand the utilization of heartworm and in this case, vector-borne disease screening, and really -- so our focus is in that area with the 4Dx Plus test and of course, all the medical education and support that we give with that offering.

Great. Thanks for your time, guys.

Ross Taylor, CL King.

I just have kind of two topics I wanted to ask you about. First of all, did I catch from you're prepared remarks that your protocol rebate programs are still relatively insignificant in Europe? And related to this, I just wanted to clarify, are these programs primarily to you economically because they're helping to drive your instrument placements, or are you actually also seeing an improvement in kind of same-clinic revenue and profitability for the consumables as well?

To answer the first question, they're really not introduced in Europe yet. We think there may be -- every country in Europe is a little different, and there may be some opportunities to do so in Europe, but not as of this point in time. They are certainly helpful with instrument placements. They also provide a nice framework for customers to expand utilization.

So, I think their part of the story of moving to realtime care where that primary first screen or what we call it in the medical profession, the minimum database of chemistry and hematology values is run at the point of care upon presentation of the pet. And so they provide, if you will, the foundation for that. I think an answer to an earlier question, we're too early to really see -- to be able to measure that at this point in time.

Okay. And the last question is fairly minor, but I noticed in your guidance some of the FX rates you're using are a little bit below where the current market rates are, and I was wondering if there is a particular reason for that.

Well, I think the rates have sort of been all over the place recently, and so our feeling was it's typically, it just feels like with the environment that we have in Europe that probably $1.25 as were looking at over the years is as good a rate as any. And I think that's why, Ross, because we can't predict these things very well, we're just pretty clear about stating what our rates are and then giving the sensitivity guidance and metrics for you. So, everybody can calculate what the changes would be.

Okay. That's good. Thanks very much.

Erin Wilson, BofA Merrill Lynch.

Most of my questions have been answered but I noticed that you established a relationship with one of your distributors, NWI, connecting them to the Cornerstone platform, and I think that starts April 1, if I recall. Can you elaborate on this relationship and other opportunities or existing similar relationships with other distributors, and does this offer some sort of stickiness to your model?

We have a relationship with one of our distributors, I suspect over time that will grow, that allows customers with our practice management software to have a greater level of electronic integration with the distributor. We think that is really part of the entire trend of moving to information technology to make their practices increase the standard of care, and this case increase the productivity and the profitability of the practice. So it's very exciting.

And I think it brings great value to our customers who use Cornerstone. And what I will tell you is that people who purchase our practice and management software, they usually keep it for a very long time. There's very little change in the install base kind of over time of practice and management software. It's not a decision that you make lightly and you want to make one with somebody who is going to be in the market for a long time and continuing to innovate with advanced releases.

And we haven't really spent any time in this call, but we have in past calls. We are just very excited about Cornerstone and its ability to move into electronic medical records and enter integration with the in-house systems, whether they be diagnostics or others, and with suppliers, such as in this case, with distribution. So, I think it's just a continued evolution of that conductivity that's taking place.

Okay. Thanks, that was a lot of information. On the bioresearch opportunity, I know it's still very, very small but how can we track the performance of this business going forward?

It's pretty small, I think we're going to have it within the parts of the business, the Reference Labs and the point of care. We were certainly very pleased with having completed the acquisition of RADIL, and we've been very pleased with the integration to date, and indeed the performance in that business in the short time that they've been part of the IDEXX family.

And we're also very excited, they really had an outstanding reputation, but the revenue has been primarily domestic. And it's really a global market. And so one of the opportunities that we see in bioresearch is to expand that capability Internationally.

Again, when I was in Europe with our European organization, they were excited about the opportunity to expand the bioresearch presence. But it's so small in relation to the larger businesses, I think we'll be tracking as part of the larger lines of business.

Okay, great. Thanks.

Nicholas Jansen, Raymond James and Associates.

One quick question. Most of my questions have been answered, but thinking about kind of placement activity for 2012. Certainly you had kind of a robust finish to 2011. I know you gave initial guidance last year kind of what you anticipated for kind of ProCyte placement growth.

Just maybe any expectations surrounding the number of placements for 2012. And also with Catalyst, you're several years into the placement ramp, just your expectations for Catalyst placements heading into 2012? Thanks.

Hi, Nick. With regard to, let me just say broadly, our hematology lines, so we've got a LaserCyte, and ProCyte, we are anticipating approximately a 15% unit growth year-to-year for ProCyte that would kind of translate we're expecting about 1,400 placements. And as we look at our chemistry line, Catalyst and VetTest, we're expecting about a 5% to 10% growth across both.

Perfect. That's all I had. Thanks, guys.

Mitra Ramgopal, Sidoti & Company.

Just a quick question regarding Europe. Clearly as we look at the numbers, it's now about 43% to revenue, and with the investments your planning and increasing infrastructure there. How do you see that number moving over the next couple of years?

I think the 43% is total International, and so, is the question with regard to Europe or International in general?

Overall. As Europe grows and even in Asia, how much has International sort of become? Do you see it becoming 50-50 over the next five years or so?

It's a question that I get frequently, and I'm certainly very, very excited about the growth internationally. But quite frankly, I'm pretty excited about the growth domestically too, because the US is really going through a technological -- the US market for veterinary care is going through an information technology revolution, which is really able to change the game in terms of the pet owner client experience and appreciation for veterinary care.

So, while we think that the International markets are underdeveloped in relation to the US market, we think the US market is underdeveloped in relation to what we're seeing leading practitioners accomplish with pet owners.

And if we're not talking demographics here, we're not talking geographies, we're just talking about practices who are very, very successful in communicating the value of care and having a greatly expanded, therefore intensity, of care, which quite frankly, lengthens the life of the pet and lowers the cost of that pet over the long-term because you don't have as many chances for chronic or acute intervention.

And so that's a long way of answering that I don't think those numbers will change a lot between domestically and internationally. They do change as much because of currency as they do underlying volumes in those core markets. But having said that, 10 years ago, I think the mix was 39% International, and today the mix is 43% International. So, there has been shift in that direction.

Thanks.

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

I just want to thank everybody for joining the call, and it being the wrap up of 2011, I also just want to take this opportunity to thank and congratulate all of our employees and indeed of course, our customers.

We wouldn't be in the market without our customers, and we know we have to win our customers' confidence everyday. And we look forward to continuing to do that in 2012. Thank you. That ends the call.

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